OTTAWA (Reuters) - The rate of underlying inflation in Canada is well below the Bank of Canada’s 2 percent target but not so low that it suggests economic weakness, Deputy Governor John Murray said on Thursday.

At the same time, Murray cautioned against assuming inflation worries were over as some measures of price growth suggest the real inflation rate is slightly above the target.
“Can we assume that inflation in Canada is not much of a problem? I wouldn’t want to go that far, but the relatively low level of CPIX (core inflation) does provide at least some reassurance that inflationary pressures are reasonably contained,” he said in the text of a speech he was delivering in Toronto.
The central bank targets 2 percent inflation and would be more likely to cut interest rates if it thought the inflation rate would significantly undershoot that goal and to raise rates if inflation were spinning out of control.
To guide it in monetary policy, the bank closely watches core inflation, which excludes volatile items and is considered a more reliable measure of long-term price trends. Core inflation stood at 1.5 percent in July while total inflation, which includes items such as gasoline, jumped to a five-year high of 3.4 percent.
Both measures are expected to hit the 2 percent market in the latter half of 2009, Murray said.