Canada April Inflation Was Below Forecast as Food Tempered Gasoline Gains

Canada’s inflation rate and retail sales were less than economists forecast, adding to evidence the central bank will delay raising borrowing costs for several months as the economy recovers.

Consumer prices rose 3.3 percent in April from a year earlier, Statistics Canada said today in Ottawa, less than the 3.4 percent gain economists predicted. Retail sales for March were little changed, a result weaker than any economist had forecast, with rising gasoline sales offset by declines in furniture, clothing and entertainment.

Bond yields and the currency fell as investors raised bets the Bank of Canada may wait until October to raise interest rates from 1 percent. Governor Mark Carney said in a May 16 speech that inflation above the bank’s 1 percent to 3 percent target range would be driven by temporary increases in sales taxes, food and energy costs.

“This report will soothe some fears of rising inflation,” said Sal Guatieri, a senior economist at Bank of Montreal in Toronto. “In the near term, yes, it weighs towards a delay in raising interest rates.”

Investors, on balance, are no longer betting on the central bank raising its benchmark interest rate by its Sept. 7 meeting. The odds of a September increase fell to 42 percent today from 55 percent yesterday, according to Bloomberg calculations based on overnight index swap rates. The probability of an October rate increase was 68 percent today, down from 77 percent yesterday. The bank’s next meetings are May 31 and July 19.

Dollar Weakens

The Canadian currency weakened 0.8 percent to 97.57 cents per U.S. dollar at 10:05 a.m. a.m. in Toronto, from 96.76 cents yesterday. One Canadian dollar buys $1.0249. The Canadian dollar rallied on April 29 to 94.46 cents per U.S. dollar, the strongest level November 2007.

“Underlying inflation is still pretty benign,” Societe Generale SA economist Rudy Narvas said in a telephone interview from New York. “The dollar is doing most of the work for the Bank of Canada” in restraining inflation, he said, adding “the ability of businesses to pass on price increases to customers is actually falling.”

Narvas and David Tulk of TD Securities moved their forecasts this week for the next Bank of Canada interest-rate increase to September from July.

Today’s reports follow others that pointed to weakening consumer spending, including existing home sales, wholesale sales and Statistics Canada’s index of leading indicators.

‘Carefully Considered’

Carney said in his Ottawa speech that future interest-rate increases will be “carefully considered.” He raised rates three times last year.

The consumer price index rose 0.3 percent in April from March, slower than the prior monthly jump of 1.1 percent and below the 0.5 percent forecast by economists.

Energy prices rose 17 percent in April from a year earlier, Statistics Canada said today. Gasoline prices rose 26 percent, bringing them within 5 percent of their record high posted in July 2008.

Canadian lawmakers will ask gasoline industry executives to explain the recent jump in prices, Tony Clement said May 12. Price movements aren’t transparent enough, Clement said. At the time, Clement was industry minister and two days ago he was named president of the Treasury Board by Prime Minister Stephen Harper in a cabinet shuffle.

Food Price Gains

Food prices rose 3.3 percent from a year earlier. Vegetable prices gained 4.3 percent in April, slowing from the 19 percent annual pace seen in March. On the month, vegetable prices fell 7.7 percent.

Other food prices were higher in April, with bakery products rising 6.7 percent on the year and meat prices 5.5 percent higher.

“Food inflation is certainly the challenge of the year,” Maple Leaf Foods Inc. Chief Executive Officer Michael McCain said on an April 28 earnings call. “This is not only a challenge in the quarter, but will likely roll its way through the entire year, as the effects of a 122 percent corn-price increase and a 90 percent wheat-price increase year-over-year weaves its way through the food chain.”

The core inflation rate, which excludes eight volatile items such as gasoline, slowed to 1.6 percent from a year earlier in April, from March’s 1.7 percent advance. Monthly core prices rose 0.2 percent, after March’s 0.7 percent gain. The results matched economists’ forecasts.

Bank of Canada Deputy Governor Tim Lane said yesterday that the bank had noted the impact of rising energy prices on inflation.

“That’s something that we expect to have a temporary effect on inflation,” Lane said. “Core inflation remains well- anchored and we expect it to converge to the 2 percent target over the period ahead.”

Alcohol and tobacco prices rose 2.4 percent on the year in April, while clothing and footwear prices fell 1.1 percent from a year earlier.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net.

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