Inflation falls to lowest level in three years at 0.8%

Meanwhile, the economy grew by a minimal 0.1% after a flat month in September and 0.1% contraction in August. Over the past three months, Canada’s economy has essentially not grown.

It was a good day for the pessimists.

Markets were also weighed down by a setback in negotiations to avert a budget crisis in Washington, which has the potential to drop the U.S. into another recession sometime next year.

After a vote failed in the House of Representatives on Thursday, Republican majority leader John Boehner said Friday it will be difficult for the two sides to bridge the gap.

The Canadian dollar was down about half a cent Friday afternoon, although it had been even lower in the morning. The Toronto stock market was little changed.

A loss in U.S. growth would also rebound on Canada, which is experiencing problems of its own, including a cooling housing market and high consumer debt.

“Our bearish call a year ago for moderate to weak GDP growth, subdued inflation and prolonged low interest rates is looking prescient now,” said David Madani, an analyst with Capital Economics in Toronto.

He says he expects the Canadian economy to grow at only one per cent next year.

That’s about half the consensus forecast. Many economists believe Canada’s growth will strengthen next year, although it may not come until the second half of 2013.

Low inflation is often seen a a positive for consumers, since the buying power of their dollar remains intact if prices remain stable. Even small wage increases above the inflation rate can improve personal finances.

But Bank of Montreal economist Doug Porter cautions about “too much of a good thing” — such as a period of falling prices, or “deflation” — that could be caused by lower housing prices, high consumer debt and government spending restraint.

“I don’t think we’re in the danger zone yet, but we’re not far away,” Porter said.

“(Deflation) means debtors can find themselves in deep trouble … because it means their debt actually starts going up in real terms and as we’ve see in Japan, once you slip into deflation, it’s a trap that’s difficult to get out of,” Porter said.

It would particularly problematic for Canada because household debt is now at a record 163% of annual discretionary income.

The Bank of Canada considers two per cent the ideal inflation rate, and hopes at worst to keep it within a range of one-to-three per cent.

Falling prices are not expected in Canada, however. While weak, both the global and Canadian economies are still growing. As well, few expect world oil prices, the major reason for October’s price fall-off, to keep falling.

One indication that steep drops in prices are unlikely was that core inflation — a measure of underlying pressure that excludes volatile items such as energy and fresh fruit — mostly held its ground at 1.2% in October.

The major contributor to the low headline number was a one-month 5.7% drop in gas prices from October, which took pump prices to about where they stood a year ago.

In addition, Statistics Canada said automobiles cost 1.8% less last month than they did in November 2011, mainly due to rebates dealers have put in place.

In an accompanying note, Statistics Canada said it had adjusted how it measures the passenger vehicle index to better reflect manufacturers’ marketing strategies for new models, but the change would not have altered the result for November. The agency said it will make further modifications in March.

On a monthly basis, the agency’s basket of goods it measures cost 0.2% less than it did in October.

While prices continued to rise moderately on most items, there were also outright declines.

Fresh vegetables were 5.8% less expensive in November than a year ago, mortgage interest costs were three per cent lower, natural gas fell 6.8%, video equipment 12.7%, transportation 0.2%, and clothing and footwear 0.6%.

On a monthly basis, prices were lower on gasoline, clothing, electricity, hotel rates and mortgage interest costs.

Regionally, inflation was highest in Prince Edward Island and Quebec at 1.5%, and lowest in British Columbia, at a barely visible 0.1%.