Canada Inflation Slows to 2.1% in July on Gasoline Prices

Canada’s inflation rate slowed for the first time in five months in July, supporting policy maker views that recent price pressures were temporary and didn’t reflect tightening slack in the economy.

Annual consumer price inflation slowed to 2.1 percent in July following June’s 2.4 percent pace, which was the highest in two years, Statistics Canada said today from Ottawa. The core rate, which excludes more volatile items such as gasoline, also slowed.

Bank of Canada Governor Stephen Poloz, who has kept the central bank’s benchmark rate on overnight loans between commercial banks unchanged at 1 percent since taking the post last year, has sought to downplay a recent spike in inflation, suggesting the pressures were caused by one-time gains in energy and import prices and didn’t reflect changes in economic fundamentals.

The report “does give some wiggle room to the Bank of Canada to continue to sound fairly neutral,” said Camilla Sutton, chief currency strategist at Bank of Nova Scotia in Toronto. The central bank’s next interest rate announcement is scheduled for Sept. 3.

Poloz’s forecasts of persistent economic slack have been tested by some data that are showing the nation’s economy accelerated in the second quarter. Statistics Canada reported earlier today that retail sales surged 1.1 percent in June, a sixth consecutive gain that exceeded all economist forecasts. Retail sales increased 3.3 percent between April and June, the biggest three month gain since 2010.

Quarterly Growth

Strong consumer spending probably helped Canada’s economy expand at a 2.6 percent pace in the second quarter, up from 1.2 percent, economists estimate. Today’s retail sales data was the latest major report before Statistics Canada releases quarterly GDP data on Aug. 29.

Canada’s inflation rate had been accelerating since touching a 2014 low of 1.1 percent in February. In a report last month, the central bank cited temporary forces such as gains in energy costs and tighter meat supplies, and claimed those pressures are being balanced by increased retail competition and slack in the economy.

The report “lends a little bit more credibility to what they’ve been saying,” said Robert Kavcic, senior economist at the Bank of Montreal.

Economists surveyed by Bloomberg News forecast inflation would be 2.2 percent, according to the median of 20 responses.

Slower Inflation

The Bank of Canada forecasts inflation will slow below 2 percent next year before rising again to its target in 2016. The central bank is mandated to keep consumer-price increases in the middle of a 1 percent to 3 percent band.

The Canadian dollar was little changed after the report, trading at C$1.0950 per U.S. dollar as of 10:40 a.m. in Toronto.

The core inflation rate decreased to 1.7 percent in June after a gain of 1.8 percent the prior month. Economists surveyed by Bloomberg News forecast a 1.9 percent rate for core.

Total inflation fell 0.2 percent in July from June and the core rate was down 0.1 percent. Gasoline prices fell 1.9 percent last month, helping to lead a 0.6 percent drop in energy costs.

Other items recording lower prices over the month included passenger vehicles, which were down 2 percent, and clothing and footwear, which fell 1 percent.

Economists surveyed by Bloomberg had predicted that prices would fall 0.1 percent in July from June, and the core rate would rise 0.1 percent.

On a seasonally adjusted basis, Canada’s headline consumer price index fell 0.1 percent in July, the first decline for that measure since October. The seasonally adjusted core rate was up 0.1 percent.