OTTAWA (Reuters) - Moderating energy prices helped slow Canada’s annual inflation rate in June from May, suggesting the central bank has breathing room to take a gradual approach to future interest rate hikes.
The consumer price index dipped 0.1 percent in the month for an annual rate of 1.0 percent, Statistics Canada said on Friday. It was the first month-on-month decline for total CPI since December 2009.
The annual rate was in line with analyst expectations. In May, consumer prices climbed 0.3 percent in the month for an annual rate of 1.4 percent.
“At the margin, it could encourage the Bank of Canada to go very slow, as far as raising interest rates,” said Sal Guatieri, senior economist at BMO Capital Markets. He said deflation in Canada is much less a risk than in the United States.
The data arrived on a week that the Bank of Canada raised interest rates for a second time in as many months and cautioned of uncertainty in the global recovery, cutting its domestic growth outlook but keeping its inflation view unchanged.
The central bank said explicitly for the first time in its quarterly Monetary Policy Report that its outlook assumes “a gradual reduction in monetary stimulus consistent with achieving the inflation target.”
Sebastien Lavoie, assistant chief economist at Laurentian Bank Securities, said the data keeps Bank of Canada Governor Mark Carney in the “best of both worlds.”
“He doesn’t need to be overly hawkish or overly dovish,” he said.
“He just has to take the decision one by one and that’s what he intends to do.”
Price pressures around the world remain subdued. U.S. consumer prices fell for a third straight month in June, although prices excluding food and energy rose 0.2 percent, the largest monthly gain since October.
Inflation in Brazil, which like Canada is a commodities exporter, unexpectedly fell in the month to mid-July while in Mexico prices rose less than expected.
Markets are pricing in about a 50 percent chance of a 25 basis-point hike in Canadian rates on September 8, little changed from before the report, according to yields on overnight index swaps that reflect expectations for the policy rate.
The Canadian dollar dipped briefly against the U.S. dollar to a session low at C$1.0440 to the U.S. dollar, or 95.79 U.S. cents, but rebounded quickly to sit slightly firmer than Thursday’s North American finish.
Overall, energy prices rose 1.3 percent compared with a 6.2 percent jump in the previous month.
Consumers paid 2.9 percent less for gasoline in June, the first such drop in prices at the pump since October 2009, after gas advanced 6.9 percent in May. Natural gas prices increased 3 percent in June after rising 4.7 percent in May.
Annual core CPI, which excludes volatile items like gasoline, was 1.7 percent, slightly below last month’s 1.8 percent and still below the bank’s 2 percent target. Core CPI rose 0.1 percent in the month.
Prices climbed for seven of eight major components, but not for clothing and footwear.
With the introduction of new sales tax regimes in Ontario and British Columbia in July, inflation is expected to push above the Bank of Canada’s 2 percent target, but the central bank has said it will look through this effect. Core prices should not show as much upward pressure, analysts said.
Additional reporting by Louise Egan in Ottawa, Claire Sibonney, Euan Rocha and John McCrank in Toronto; Editing by Jeffrey Hodgson