July 23, 2008 / 11:12 AM / 9 years ago

Inflation climbs to highest since Sept 2005

<p>Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007. REUTERS/Christinne Muschi</p>

OTTAWA (Reuters) - Annual inflation sped past expectations to 3.1 percent in June from 2.2 percent in May after the biggest yearly surge in gasoline prices since Hurricane Katrina, Statistics Canada said on Wednesday.

June marked the first time since September 2005 that inflation rose past the central bank’s target range of 1-3 percent. The Canadian dollar rose slightly after the report.

But the Bank of Canada, which last week forecast inflation would peak at 4.3 percent early next year, has signaled it will not try to curb the rampant price growth through interest rate hikes because it expects the underlying price trends to stay in check.

The June results proved it right. Core inflation -- which strips out volatile items like gasoline and food -- was unchanged from May at a tame 1.5 percent.

Financial markets had expected total inflation of 2.9 percent and a core rate of 1.6 percent. Excluding only gasoline, consumer prices rose 1.8 percent.

“The idea that it’s gasoline pushing up consumer prices has already been very well telegraphed so there’s not really a heck of a lot of surprise in the number set here,” said Stewart Hall, market strategist at HSBC Canada.

“There’s no reason to really believe that there is any kind of monetary response to come off of this,” he said.

The Canadian dollar moved to C$1.0098 to the U.S. dollar, or 99.03 U.S. cents, from its pre-data level around C$1.0100 to the U.S. dollar, or 99.01 U.S. cents. Government bonds were little changed.

Bank of Canada Governor Mark Carney has emphasized that the oil-induced inflationary spike would not last long, and a rate hike could stunt the economy’s recovery amid expectations it will grow this year at the slowest pace since 1992.

The bank left rates unchanged at 3 percent last Tuesday, for the second straight time.

Most analysts now expect it to stand pat at least through September. But the comfortable core inflation rate means “there is room for the Bank of Canada to reduce rates once again if needed,” Scotia Capital said in a research note.

FOOD INFLATION

But consumer views of inflation may be less sanguine as they are getting hit on high-frequency purchases like food and gasoline while only big-ticket items like cars are actually falling in price.

Inflation expectations are a big concern at the central bank and could explain why Carney downplayed the trend at length following the rate decision.

“The constant trips to the pump and the bread aisle at the grocery story are persistent reminders that Canadian’s are facing a changed pricing environment,” said Stewart Hall, markets strategist at HSBC Canada.

Gasoline prices in June were about 27 percent higher than in June 2007, the biggest leap since oil markets were disrupted by Hurricane Katrina in 2005, Statscan said.

Signs of incipient food inflation were also evident in the report with a 3 percent rise in the cost of store-bought food year-on-year and a 12 percent jump in bakery products.

Mortgage interest costs surged 9 percent in the same period, largely due to higher new housing prices, and air transportation rose 14.3 percent.

However, car dealers chopped prices 8.4 percent to lure consumers who appear to be starting to seek alternative means of transport as they feel the pinch from gasoline prices.

Additional reporting by Frank Pingue in Toronto; Editing by Frank McGurty

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