Business

Inflation drop in June surprises economists

The annual inflation rate dropped to 3.1 per cent in June from 3.7 per cent in May, with Statistics Canada crediting a drop in hotel prices and lower vehicle costs as some car manufacturers offered large discounts.

'Shocking on the low side,' one says

Food prices in June were 4.8 per cent above the June 2010 level, Statistics Canada said. (Jacques Boissinot/Canadian Press)

The pace of inflation unexpectedly cooled in June, despite jumps in the cost of gasoline and basic foodstuffs. Statistics Canada said the annual inflation rate was 3.1 per cent in June, down from 3.7 per cent in May.

The core rate, which strips out changes in indirect taxes and eight of the most volatile components identified by the Bank of Canada, was 1.3 per cent.

The statistics agency said much of the drop in the rate from June was due to lower prices for passenger vehicles due to manufacturers' discounts and lower costs for travel accommodation.

Economist Avery Shenfeld of CIBC called the report "shocking on the low side."

Provincial inflation rates in June (May in brackets)

Newfoundland and Labrador: 3.2 (3.7)

Prince Edward Island: 3.4 (3.9)

Nova Scotia: 4.4 (4.6 )

New Brunswick: 3.6 (4.1)

Quebec: 3.0 (3.5)

Ontario: 3.6 (4.0)

Manitoba: 3.2 (3.9)

Saskatchewan: 2.6 (3.4)

Alberta: 2.1 (2.8)

British Columbia: 2.7 (3.1)

Whitehorse 3.0 (3.6)

Yellowknife 2.7 (3.2)

Iqaluit: 0.4 (1.2)

Doug Porter, deputy chief economist for BMO Capital Markets said: "Overall, big surprise, big relief."

The Canadian dollar fell ll 0.53 of a cent to 105.25 cents US following the report, taking it down from 106.11 cents on Thursday, its highest level since late November 2007.

Analysts were divided on whether the news will ease pressure on the Bank of Canada to act on interest rates. While the pace of inflation slowed, higher prices for gasoline and food bought from stores kept the rate above three per cent.

Food prices rose 4.8 per cent from June of 2010 and overall energy prices were 15.7 per cent higher than a year earlier. The price of gasoline was 28.5 per cent higher on a year-over-year basis, although it actually dropped slightly, compared with May.

While cars and hotel rooms were less expensive, consumers still paid more for many commodities.

The cost of transportation rose 7.0 per cent on an annual basis to June. In addition to higher gas prices, drivers paid 4.4 per cent more for insurance. The cost of air travel was 7.6 per cent higher.

Food prices rose broadly on a year-to-year basis. Meat prices increased 5.9 per cent, while the cost of bread jumped 10.1 per cent and fresh vegetables cost 8.4 per cent more.

The cost of restaurant meals, however, rose by only 3.3 per cent.

Shelter costs rose 1.7 per cent from June 2010, with higher prices for fuel oil, electricity. However, mortgage interest costs slipped 1.9 per cent and natural gas was also cheaper.

Cable and satellite services cost 7.9 per cent more than in June 2010.

The pace of inflation slowed in every province compared with May. Nova Scotia had the fastest increase in consumer prices at 4.4 per cent, while Alberta had the slowest, at 2.1 per cent.

Low rate gives central bank time to consider rate hike

The inflation report came just two days after the Bank of Canada said it would keep its key interest rate at one per cent.

Porter said the latest figures will likely give the bank some added time to come to a decision on a rate hike.

"Today's much more benign reading for both headline and core inflation takes the near-term pressure off the Bank of Canada to do anything quickly on rates, assuming of course we don't get yet another massive reversal in prices next month."

Shenfeld said the report likely surprised the central bank, especially the core rate.

"All told, some key breathing room for the (bank) since even though the core rate will likely drift up as some low numbers drop out from the 12-month calculation in the coming quarter, odds now favour it remaining below two per cent."

Dawn Desjardins, assistant chief economist at RBC Economics, said the inflation data, coupled with other strong indicators, including better unemployment numbers and a firming housing market, may prompt the central bank to raise rates by fall.

"This improved momentum in the growth numbers, in the absence of any external disturbance, will likely to be enough to prompt the bank to restart its rate-hike cycle," she wrote.  "While the decline in today's core rate may dent expectations of a near-term move, the likely rebound in July keeps the odds tilted toward a 25 basis point increase at the September meeting."

 

 

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