Canada’s Inflation Was Slower Than Forecast in June

Canadian consumer prices rose less than forecast in June as fuel costs extended their decline, reinforcing forecasts the nation’s central bank won’t raise its policy rate until at least next year.

The consumer price index climbed 1.5 percent in June from a year earlier, compared with a 1.2 percent gain the prior month, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, increased 2.0 percent after a gain of 1.8 percent in May. Economists surveyed by Bloomberg projected a 1.7 percent gain for CPI and 2.3 percent increase for the core figure.

Bank of Canada Governor Mark Carney kept his policy interest rate at 1 percent this week and said inflation will “remain noticeably below” his 2 percent target over the next year, even as he said higher policy interest rates may be needed as the world’s 10th biggest economy approaches its capacity.

While today’s report probably doesn’t fundamentally change the central bank’s outlook, it “does allow them to stay on hold for longer given that inflation has been surprising on the low side,” said Doug Porter, deputy chief economist at Bank of Montreal (BMO), by telephone.

The Canadian dollar weakened after the report, falling 0.5 percent to 1.0128 per U.S. dollar at 9:57 a.m. in Toronto. One Canadian dollar buys 98.74 U.S. cents. Bonds rose, with the yield on the benchmark 2-year falling 3 basis points to 0.95 percent.

Benign Inflation

The benign pace of inflation gives the Bank of Canada room to keep interest rates on hold while it gauges the strength of the global economy, said David Watt, chief economist with HSBC Canada Bank in Toronto.

“The factors that it can usually control, which are the domestic things, are suggesting the bank is probably too easy, but it’s the global factors over which the bank has little impact that could potentially have a larger impact on the Canadian economy,” Watt said in a phone interview. He doesn’t expect Carney to raise the central bank’s key lending rate until 2014.

Natural gas prices declined 13.7 percent in June from a year earlier, following a 16.6 percent drop in May, Statistics Canada said. Gasoline costs fell 1.8 percent, the second straight decline.

Encana Corp. (ECA), the country’s biggest natural-gas producer, has seen its stock fall almost 30 percent over the last year as natural gas prices fell. The company’s shares traded at C$20.75, a decline of 18 cents.

Cheaper Video

Inflation in June was also restrained by a 14.9 percent drop in video equipment prices, while mortgage interest costs fell 1.0 percent.

Prices of passenger vehicles rose 3.9 percent in June compared with a year earlier, while electricity costs increased 5.9 percent.

On a monthly basis, both the total and core price indexes fell 0.4 percent in June. Economists surveyed by Bloomberg predicted consumer prices would fall of 0.2 percent in the month and the core index would decline 0.1 percent.

Seasonally adjusted consumer prices fell 0.2 percent in June from May, while the core index rose 0.1 percent. Statistics Canada also revised its estimate of May’s decline in seasonally adjusted prices to 0.3 percent from 0.2 percent, and revised its core index estimate to a decline of 0.1 percent from no change.

To contact the reporter on this story: Andrew Mayeda in Ottawa at amayeda@bloomberg.net

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

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