Canada Inflation Slows 2nd Month in August on Natural Gas

Canada’s inflation rate unexpectedly slowed for a second month in August and a key price measure tracked by policy makers was the lowest in more than a year, indicating little pressure for Bank of Canada Governor Mark Carney to raise interest rates.

The consumer price index rose 1.2 percent in August from a year ago compared with a 1.3 percent gain the prior month, Statistics Canada said today from Ottawa. The core rate, which excludes eight volatile products, increased 1.6 percent after a July gain of 1.7 percent. Economists surveyed by Bloomberg forecast that the total rate would stay at 1.3 percent and core inflation would be 1.5 percent.

Carney said earlier this month he may raise interest rates as the economy moves to full output next year, and that inflation would return to its 2 percent target over the next 12 months. Economists surveyed by Bloomberg have cut their growth and inflation forecasts this month, while another report today showed that wholesale sales fell a faster-than-expected 0.6 percent in July.

“Inflation isn’t that pressing a concern for the Bank of Canada,” said Mazen Issa, Canada macro strategist at Toronto-Dominion Bank’s TD Securities unit. Carney’s inclination to raise interest rates will remain, he said, because “the economic recovery is still well advanced in Canada” compared with other major countries.

Pared Gains

The Canadian dollar pared gains after the report. It strengthened 0.2 percent to 97.47 cents per U.S. dollar at 9:55 a.m. in Toronto. One Canadian dollar buys $1.0260. Government bonds were little changed, with benchmark 10-year yields holding steady at 1.86 percent and two-year yields falling one basis point to 1.14 percent.

Natural gas costs dropped 14 percent in August from a year earlier, Statistics Canada said, while other energy costs rose, including a 2.2 percent gain for gasoline.

Mortgage interest costs declined by 1.8 percent and women’s clothing costs declined by 3.4 percent, according to the report. Food costs rose, including a 5.7 percent increase for meat and a 2.2 percent advance in restaurant meals.

Companies such as grocery-store chain Sobeys Inc. are predicting that inflation will remain modest because consumers aren’t willing to bid up prices. “The market is extremely competitive right now,” Chief Executive Officer Marc Poulin said on a Sept. 13 earnings call, where he reported retail prices were little changed for its fiscal first quarter.

Weak Data

Other reports this month have shown a record trade deficit, falling factory sales, and declines in labor productivity and building permits. Today’s data makes it more likely the central bank will modify its language about interest rate increases at the Oct. 23 announcement, said Derek Holt, Scotiabank’s vice-president of economics in Toronto.

“The Bank of Canada’s 2 percent inflation target is being undershot by a fair margin,” and its forecast about the economy reaching full output “is looking increasingly unlikely,” Holt said in a note to clients.

The central bank sets interest rates to keep inflation at the 2 percent midpoint of a 1 percent to 3 percent target range.

On a monthly basis, total inflation rose 0.2 percent in August and the core rate rose 0.3 percent. Economists surveyed by Bloomberg predicted that both monthly rates would advance by 0.3 percent.

Seasonally adjusted inflation rose 0.4 percent in August from July, the first gain in four months, and the adjusted core rate rose 0.3 percent.

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