Business

Inflation pressures eased in July

The pace of inflation eased in July to 2.7 per cent as increases in the price of gasoline slowed, Statistics Canada said Friday.
Statistics Canada says July was the first month since February when price increases slipped below a pace of three per cent. (Pawel Dwulit/Canadian Press)

The rate of retail price increases eased in July, Statistics Canada reported Friday, as the rise in the cost of gasoline slowed.

StatsCan said its consumer price index rose at an annual pace of 2.7 per cent in July, down from a 3.1 per cent increase in June, and in line with economists' expectations.

 The apparent slowing in inflation gives the Bank of Canada room to keep interest rates at their exceptionally low levels.

Later Friday, in an address to the Commons finance committee, Bank governor Mark Carney said both that 2.7 per cent rise, the so-called "headline" measure of inflation, and core inflation — the measure of price increases with more volatile energy and food removed — "are consistent with our expectations."

Core inflation is the gauge the Bank watches most closely to determine the level of interest rates.

July was the first month since February when price increases slipped below a pace of three per cent, leading TD Bank deputy chief economist Derek Burleton to say the "inflation genie" appeared to remain tucked in the bottle.

"It will give the Bank of Canada some wiggle room to keep rates low during this period of global uncertainty," Burleton said.

"The thinking has shifted now to the fact that economic growth is probably going to slow and the fact that core inflation is still below the Bank of Canada's target (of two per cent) means that inflation really isn't a major risk at the moment."

Most of the decline in inflation resulted as the effects of the introduction of the Harmonized Sales Tax in three provinces last summer was dropped out of the calculation for annualized price increases.

Those tax increases raised the annualized inflation rate for the country by 0.7 percentage points in the past year.

The categories of the CPI showing the greatest slowing in price increases were health and personal care, transportation and household furnishings.

Energy prices were the main reason for the increase in inflation. Those gained 12.9 per cent from a year ago.

But that was down from a 15.7 per cent increase in June.

Gasoline prices were still higher by 23.5 per cent from a year earlier.

Gasoline prices in July were still up 23.5 per cent from a year earlier. (Richard Buchan/Canadian Press)

Clothing and footwear price increases picked up marginally from the month earlier, up by one per cent, compared with a one-month increase of 0.7 per cent in June.

Food prices were up by 4.3 per cent, matching June's increase.

Auto price increases continued to slow, falling one per cent after the second largest decline in half a century in June, as dealers used incentives and no-interest borrowing to encourage debt-laden consumers to buy.

Core inflation slowed to 1.2 per cent, compared with 1.4 per cent in June. The Bank of Canada's target for core inflation is two per cent.

BMO senior economist Sal Guatieri noted that the core rate appeared to be on track to fall short of the Bank of Canada's estimate of 1.9 per cent for the third quarter.

"While Canadian inflation has been more volatile than usual of late, core inflation looks to settle just below the two per cent inflation target, providing an anchor for the headline rate to gravitate toward," Guatieri wrote in a note to clients.

"The tame core reading will buy the Bank of Canada time to remain on the sidelines, and is clearly no obstacle for rate cuts should global recession risks intensify."

Last week, the U.S. Federal Reserve said it would look to keep its key interest rate near zero through the middle of 2013. The low rates in the United States will put more pressure on the Bank of Canada to keep borrowing costs on hold north of the border as well.

There had been recent speculation that the Canadian central bank would begin raising rates this fall to curb inflationary pressures in the Canadian economy, which has been growing faster than the United States.

However, economists say the recent stock market turmoil and the fears of a double-dip recession in the United States has made it likely that rates won't rise in Canada until next spring at the earliest.

With files from The Canadian Press

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