BUSINESS

Inflation Canada: Gas Up But Food Prices In Check In July

08/23/2013 08:31 EDT | Updated 10/23/2013 05:12 EDT
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OTTAWA - Canada's annual inflation rate edged up one-tenth of a point to 1.3 per cent in July, a softer reading than expected that was interpreted as further evidence of a weak economy.

The Canadian dollar, which has been trending lower all week as the U.S. currency strengthened, slid about one-third of a cent shortly after the Statistics Canada report.

The loonie's slide has been partly the result of expectations that U.S. interest rates are set to begin rising before the end of this year, attracting money managers to U.S. investments offering a better rate of return..

The Bank of Canada, on the other hand, isn't expected to start raising its key interest rates until inflation begins to rise significantly, most likely as a result of a stronger economy.

"July's subdued inflation figures are consistent with an economy growing below potential, which will only reinforce the Bank of Canada's reluctance to raise rates anytime soon," Capital Economics chief economist David Madani said from Toronto.

"With growth expected to remain sluggish this year and next, it will be a long time before capacity pressures threaten to push inflation above the bank's one-to-three per cent target range for inflation."

Analysts had predicted the July inflation rate would rise by 0.2 point to 1.4 per cent, following increases of 0.5 point in June and 0.3 point in May, mostly attributed to a run-up in gas prices from the dip seen in the spring.

But the consensus of economists is that inflation will now likely flatten out at slightly above one per cent for the next few months.

Bank of Montreal chief economist Doug Porter noted that there was little evidence of inflation pressure anywhere on the horizon.

Gasoline was 6.1 per cent higher in than in the same month last year, but pump prices have since fallen somewhat.

As well, food prices appear to be as flat as they've been in years. In July, overall food costs rose a meagre 0.8 per cent from a year earlier, the smallest gain in three years. Food purchased at stores increased even less, up 0.5 per cent from 12 months earlier, as the cost of fresh fruit, fresh vegetables and meat all rose less last month than in June.

Most major components were tame. Shelter costs were 1.3 per cent higher than a year earlier, rent rose by 1.7 per cent, passenger vehicle by two per cent, and property taxes by 2.8. The rare outsized number was the 12.3 per cent jolt from natural gas, but the item is a minor contributor to inflation.

Meanwhile, many consumer goods and services registered outright declines. Mortgage costs fell 3.8 per cent, video equipment dropped nine per cent, personal care supplies and equipment slumped 2.8 per cent, medicines were 4.4 per cent lower than a year ago and travel tours 4.8 per cent lower.

"The big picture for Canadian inflation is that it is now gradually climbing from the depths of earlier this year, but it remains non-threatening. Think Flipper, not Jaws," Porter wrote in a note to clients.

"The steady drip-drip-drip drop in the Canadian dollar will add to the mild upward pressure in inflation, but a sluggish underlying growth profile for the economy and slow wage growth will restrain the upswing."

Core inflation, the best indicator of structural, underlying price pressures, stayed well anchored at 1.4 per cent, one-tenth of a point higher than in June. On a month-to-month basis, prices were also only one-tenth of a point higher.

The report held few surprises for markets and the Bank of Canada, which have long concluded that as long as the Canadian and global economies continue to struggle, interest rates remain low, demand stays tame and unemployment relatively high, there would be few pressure points in the system to sustain a run-up in consumer prices.

The Bank of Canada has forecast that inflation won't return to two per cent until sometime in 2015.

Regionally in July, Manitoba recorded the highest rate of inflation at three per cent, in part due to a one point increase in the provincial sales tax. The lowest rate in inflation came in British Columbia, where prices were unchanged in July from the same month last year.

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