September 14, 2012 / 7:18 PM / in 5 years

Canada August inflation seen remaining at weak 1.3 percent

OTTAWA (Reuters) - Canadian annual inflation likely remained benign in August despite a run-up in gasoline prices in the month, leaving the central bank free to focus on fostering growth rather than fending off price pressures through rate hikes.

The median forecast in a Reuters poll is for the consumer price index to climb 0.3 percent in the month for an annual rate of 1.3 percent, unchanged from July.

The core index, which excludes gasoline and other volatile items, is also seen rising 0.3 percent monthly for a slightly stronger annual rate of 1.5 percent.

Both measures are well below the Bank of Canada’s 2 percent target.

That means the bank may tread cautiously, monitor the risks stemming from the European debt crisis and U.S. fiscal woes and possibly postpone any rate hikes until the second quarter of next year, said Paul Ferley, assistant chief economist at Royal Bank of Canada.

Unemployment rates in the U.S. - and to a lesser extent Canada - are still historically high. “That implies slack in labor markets which traditionally limit just how much in the way of price pressure we’re going to see,” said Ferley.

“We haven’t had a lot of evidence suggesting otherwise so we have central banks focusing on growth and financial markets focusing on growth.”

In August, gasoline prices rose about 3 percent and analysts say clothing, shelter and health costs also rose but were partially offset by declines in other goods like natural gas.

“Energy prices will have a muted impact on headline inflation,” IHS Global Insight economists Arlene Kish and Jillian Kohut wrote in a research note.

“Food price inflation should also come in lower than it has in recent months. Therefore, we expect another month of soft price increases.”

Central bank chief Mark Carney has been signaling since April that he’s leaning toward hiking rates from their current 1 percent if the economy continues to catch up to its potential.

Forecasters in a Reuters poll expected the central bank to begin tightening monetary policy in the second half of 2013. <CA/POLL>

Yields on overnight index swaps, which trade based on expectations for the policy rate, suggest a slightly higher than 50 percent probability of a rate hike in April 2013.

Reporting by Louise Egan; Editing by Jeffrey Hodgson

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