Inflation slows sharply in June

Fri Jul 22, 2011 12:59pm EDT
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By Louise Egan

OTTAWA (Reuters) - Inflation in Canada slowed sharply in June from an eight-year high in May, giving credence to the central bank's forecast that price pressures would ease and allow it to raise interest rates at a leisurely pace.

Figures released on Friday also showed Canadians spent more than expected in May, boosting retail sales by 0.1 percent. High gasoline prices contributed to the rise but so did warm weather, which encouraged sales of gardening and home hardware supplies, and other general merchandise.

Overall consumer inflation slid to 3.1 percent in June from 3.7 percent in May, Statistics Canada said. Even more surprising was the core inflation reading of 1.3 percent in June, down from 1.8 percent in May. Core inflation strips out volatile gasoline and some food prices.

The Canadian dollar slid after the news and swap markets began pricing in lower expectations of interest rate increases this year.

"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.

Both measures of the consumer price index dropped to the lowest year-on-year rate since February and were lower than forecast by any of the 19 analysts surveyed in a Reuters poll.

Overall CPI inflation was still a notch above the central bank's target range but it is expected to drop further in coming months as the July 2010 introduction of higher sales taxes in some provinces will no longer be included in the calculations, chopping 0.6 points off the rate.

The dissipating price pressures add a new twist to the ever-changing outlook for Bank of Canada rate hikes. Market players have been forced to revise forecasts repeatedly in face of often contradictory data and signals from the central bank itself.   Continued...

<p>The Canadian flag is seen on top of a flagpole in the midst of high-rise buildings in the financial district of Toronto April 3, 2009. REUTERS/Mark Blinch</p>