The cost of living in Canada unexpectedly fell in August, and the 12-month inflation rate slowed on decelerating energy costs, which may ease pressure on the Bank of Canada to continue raising interest rates.
The consumer price index fell 0.1 percent in August, and rose 1.7 percent from a year ago following July’s 1.8 percent gain, Statistics Canada said today. Economists surveyed by Bloomberg forecast the price index would be unchanged during August and the annual rate would accelerate to 1.9 percent, according to the median of 16 estimates.
The Canadian dollar and yields on two-year Canadian notes fell on the report. Investors are betting there is a 40 percent chance the central bank will lift its benchmark rate to 1.25 percent at the next meeting Oct. 19, according to a calculation by Credit Suisse based on overnight index swaps. That’s down from 52 percent Sept. 16.
“The inflation numbers were relatively benign,” said Dawn Desjardins, assistant chief economist at RBC Capital Markets in Toronto. That allows the Bank of Canada the cushion to “stand pat” on interest rates in order to gauge the strength of the U.S. recovery and assess the impact of this year’s interest rate increases on the domestic economy, she said.
The Canadian dollar depreciated 0.4 percent to C$1.0320 per U.S. dollar at 8:20 a.m. in Toronto, from C$1.0282 yesterday. Yields on two-year Canadian bonds fell to 1.483 percent from 1.507 percent late yesterday.
Trade, wholesale sales and manufacturing shipment reports this month have failed to meet economist forecasts, with Statistics Canada this month reported the country’s trade gap rising to a record C$2.7 billion in July.
The central bank has raised its key rate three times since the start of June to 1 percent, even as it’s trimmed its growth forecast. The rate on the three-month overnight index swap, which measures what investors predict the central bank’s benchmark will average over that time, yesterday rose 0.3 percentage points to 1.0840 percent.
Underlying inflation as measured by the core rate, which excludes eight volatile items and changes in indirect taxes, was unchanged at 1.6 percent in August from a year ago, in line with economist forecasts. Core consumer prices increased 0.1 percent during August, also matching expectations.
Policy makers projected core inflation will average 1.8 percent through the first quarter of 2011, and that both total and core inflation will advance at a 2 percent pace throughout 2012. Bank of Canada Governor Mark Carney has raised his benchmark interest rate three times since June, and the central bank’s July forecast included a “gradual” increase in interest rates to aim inflation at the 2 percent target.
Lower prices for fresh vegetables, home and mortgage insurance and natural gas led the drop in consumer price index during the month of August. On an annual basis, inflation slowed as price increases for gasoline and electricity decelerated.