Canada July Inflation Slows to 2.7% on Sales Tax, Mortgages

Canada’s annual inflation rate slowed for a second month in July as the impact of provincial sales tax increases faded and mortgage interest costs declined.

The consumer price index increased 2.7 percent in July from a year earlier, Statistics Canada said today in Ottawa, slowing from 3.1 percent in June and May’s 3.7 percent pace that was the fastest since March 2003. Economists surveyed by Bloomberg News predicted a 2.8 percent reading according to the median of 23 responses. The inflation rate had been boosted over the past year by sales-tax increases in Ontario and British Columbia.

The core inflation rate, which excludes eight volatile items such as gasoline, quickened to a 1.6 percent pace from June’s 1.3 percent, matching economist forecasts.

Bank of Canada Governor Mark Carney testifies at a special legislative hearing at 10 a.m. in Ottawa and may speak about the economic impact of the U.S. debt-rating cut and increasing concern that European governments may default on their bonds. Last month, Carney kept the bank’s key interest rate at 1 percent while raising his inflation forecast and saying the policy rate would rise as the economy recovered.

“There is a slowdown in the Canadian economy but a lot of it is only temporary,” said Rudy Narvas, senior economist with Societe Generale SA in New York. “Economic activity is still pushing up inflation,” he said.

Prices Curbing Spending

Inflation stayed above Carney’s 2 percent target for an eighth month in July, as gasoline prices rose 23.5 percent from a year earlier and automobile insurance premiums rose 4.4 percent. Those price increases are curbing consumer spending elsewhere according to Robert Dutton, Chief Executive Officer of home-improvement retailer Rona Inc.

“Discretionary spending continued to be impacted by inflation in gas, the intention to reduce the level of debt and uncertainty about global economic conditions,” Dutton said on an Aug. 10 investor call.

Besides the impact of sales tax increases dropping out of this month’s report, inflation was slowed by a 1.9 percent decline in mortgage interest costs and a 1 percent fall in new automobile prices, Statistics Canada said.

The Bank of Canada raised its forecast for inflation July 20, saying consumer price increases will average 2.8 percent from July through September and slow to 1.9 percent in the second quarter of next year.

Currency Moves

The Canadian dollar reached the strongest in more than three years before last month’s inflation report on speculation the Bank of Canada would increase its policy interest rate this year. The central bank’s statement at its July 19 rate announcement dropped the word “eventually” from a phrase about when policy makers will move.

The currency traded at 99.07 cents versus the U.S. currency at 7:06 a.m. in Toronto, compared with 99.05 cents yesterday, when it touched 99.39 cents, the weakest level since Aug. 11. One Canadian dollar buys $1.0094.

Some investors are now betting on a rate cut at the next policy meeting Sept. 7, according to a Credit Suisse calculation based on trading in overnight index swaps contracts. Desjardins Capital Markets economics strategist Jimmy Jean yesterday said the Bank of Canada won’t raise interest rates until mid-2013, in part because the U.S. Federal Reserve said it would likely keep interest rates close to zero until that time.

Canada’s 30-year government yield fell below 3 percent yesterday, matching a drop in U.S. Treasury yields to record lows, in a sign that investors see slower growth and inflation.

On a monthly basis, overall consumer prices and the core measure both rose 0.2 percent in July from June, today’s report said, matching economist forecasts.

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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