POLITICS

Inflation rate falls in July, eases pressure on BoC to hike interest rates

08/17/2012 08:46 EDT | Updated 10/17/2012 05:12 EDT
OTTAWA - Canada's annual inflation rate fell unexpectedly in July, pulled lower by falling energy prices as Statistics Canada reported consumer prices were up just 1.3 per cent from a year ago.

The softer-than-expected report Friday buys the Bank of Canada even more time to keep interest rates low, analysts say.

Statistics Canada said higher prices for cars and trucks, restaurant meals, meat and electricity were the main drivers of inflation last month.

Nevertheless, the rate of increase was down from June, when prices were up 1.5 per cent from a year before. Economists had expected an increase of 1.6 per cent.

"This is a reflection of an economy that's still has some economic slack," said CIBC World Markets chief economist Avery Shenfeld.

"So when you're not at full employment, you simply don't have the consumer buying power to push all prices up aggressively.

"And as long as we're still sitting with an unemployment rate that's about seven per cent, I think the concern for Canadian policy-makers will still be more on getting more Canadians back at work than containing growth and inflation."

Energy prices fell 1.2 per cent in the 12-months ended in July, after falling 0.8 per cent in June.

On a seasonally adjusted monthly basis, the consumer price index declined 0.1 per cent in July, following a 0.2 per cent decline in June.

Economists had expected a month-to-month increase of 0.2 per cent.

"We're seeing a continued softness in inflation, and while we do know that the headline inflation rate will be moving higher from here as we start to reflect higher gasoline and food prices, overall it does look like we're in a tame pricing environment," Shenfeld said.

Core inflation — which excludes volatile items like energy and fresh fruit and vegetables — rose 1.7 per cent in the 12 months ended in July.

That followed a two per cent gain in June.

The Bank of Canada aims to keep inflation at an average of two per cent over the medium term.

In its monetary policy report earlier this summer, the central bank said it expects economic growth will slow to 2.1 per cent this year from 2.4 per cent in 2011, and only advance by a still moderate 2.3 per cent and 2.5 per cent in 2013 and 2014.

A continuing source of weakness is still increasing household debt, which will temper consumption, and soft export performance, which is being hurt by slowing growth in the U.S., emerging markets and Europe.

The Bank of Canada last raised its key rate, which stands at just one per cent, in September 2010.

"With core inflation running below target and external headwinds still blowing, we don't expect the Bank of Canada to resume tightening until well into next year," Robert Kavcic of BMO Capital Markets Economics wrote in a note to investors.

"With inflation remaining subdued and the downside risks to global economic growth threatening even lower inflation, interest rates are likely to remain low for a long time yet," added Capital Economics in its own investors' note.

Erin Weir, an economist with the Canadian Centre for Policy Alternatives, suggested the central bank might consider lowering rates even further.

"With inflation subdued, there is no pressure for the central bank to raise interest rates. Indeed, the Bank of Canada could intervene to bring the overvalued exchange rate down to more competitive levels without stoking significant inflation," he wrote.