Inflation unexpectedly tame in June

Fri Jul 22, 2011 7:55am EDT
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OTTAWA (Reuters) - Canadian inflation slowed sharply in June from an eight-year high in May, giving credence to the central bank's prediction that price pressures would ease and allow it to hike interest rates at a leisurely pace.

Overall consumer inflation eased to 3.1 percent from 3.7 percent in May, still a notch above the central bank's target range. But the rate is expected to drop further in coming months as the July 2010 introduction of higher sales tax will no longer be included in the calculations, chopping 0.6 points off the rate.

Core inflation, which excludes volatile items like gasoline, unexpectedly fell to 1.3 percent in the 12-month period to June from 1.8 percent in May, Statistics Canada said on Friday.

"It's a cold shower, a little bit, for those who are thinking the Bank of Canada may be raising rates as early as September," said Jimmy Jean, economic strategist at Desjardins Capital Markets.

The Canadian dollar weakened to as low as C$0.9504 to the U.S. dollar, or $1.0522, down from around C$0.9465 to the U.S. dollar, or $1.0565, just prior to the data.

Both measures of the consumer price index dropped to the lowest year-on-year rate since February and were tamer than forecast by any of the 19 analysts in a Reuters poll. The median forecast was for overall inflation of 3.6 percent and a core rate of 1.9 percent.

Lower prices for passenger vehicles were the main reason for the softer reading, along with traveler accommodations and a smaller year-on-year hike in gasoline prices. Food prices continued to climb.

Prices fell 0.7 percent month-on-month in June for total CPI and slid 0.6 percent for core CPI.

The bank held its key overnight target rate unchanged at 1.0 percent on Tuesday but signaled that it would need to hike borrowing costs soon. However, central bank chief Mark Carney also made it clear on Wednesday that he saw no need to "normalize" rates by mid-2012 as many market players had expected.   Continued...

<p>Skyscrapers loom over a flagpole carrying the Canadian flag in the financial district in Toronto, March 11, 2009. REUTERS/Mark Blinch</p>