Canada’s Consumer Price Index surprised economists with an unchanged reading in September from August, which unexpectedly lowered the year-to-year rate of increase to 2.3% from 2.6%.

The flat CPI makes further increases to interest rates this year unlikely, economists say.

“Canadian inflation proved capable of surprising to the downside, with September’s CPI report tamer than even the most benign of market forecasts,” says CIBC World Markets. “In effect, today’s report reverses the upside surprise seen in last month’s report, and puts the inflation outlook back in line with what we had earlier envisioned.”

The big news in this report was the modest reading on the Bank of Canada’s core rate measure. The Bank’s core CPI rose 0.2% in the month, at the low end of expectations, holding the year-over-year rate flat at 2.5%. TD Bank notes that it is still running 0.5% above the Bank’s midpoint target of 2%, but it says that this is unlikely to prompt a rate hike in December. “Inflation is likely to resume heading higher in the coming months. Assuming even small monthly price increases, headline and core inflation will rise well above 3% before the end of this year. However, the Bank is likely to conclude that this too will prove fleeting,” says TD.

BMO Nesbitt Burns agrees that the Bank is likely on hold in December, saying, “On balance, the moderation in both the headline and core readings will give the Bank a little more breathing room. In the months ahead, Canada is still poised to see a big increase in the headline inflation rate, although it now looks like it will fall short of hitting the 4% mark, and the Bank will likely view the run-up as temporary.”

Bank of Montreal says that the moderate CPI and weak retail sales report “weigh in favour of the Bank of Canada remaining on the sidelines.”

“Although the inflation reprieve really just undoes last month’s upside surprise, today’s report gives the Bank a little more ammunition to defend a stand-pat rate stance through year-end,” agrees CIBC.

TD predicts that core inflation should trend back down towards the 2% mark in the spring of 2003. “This suggests that the Bank has room to leave rates on hold until March, by which time the U.S. economic recovery should be stronger and the geopolitical risks will have diminished,” it says.