August 21, 2008 / 11:24 AM / in 9 years

Inflation at 5-year high, rates seen on hold

OTTAWA (Reuters) - Soaring gasoline prices drove Canada’s inflation rate in July to its highest in more than five years, but the upswing was widely expected and did little to change the view that the central bank will keep interest rates on hold in September.

The annual inflation rate quickened to 3.4 percent in July from 3.1 percent in June, the highest rate since March 2003, Statistics Canada said on Thursday.

But the core rate that is closely watched by the Bank of Canada stayed well within the bank’s target at 1.5 percent for the fourth straight month.

The consumer price index rose 0.3 percent in the month, in line with market forecasts.

But there was little evidence that high energy prices were trickling into prices of other goods as the core index, which excludes gasoline and other volatile items, advanced by a lower-than-expected 0.1 percent.

The inflationary pressure comes as no surprise to the Bank of Canada, which is widely expected to hold rates steady at 3 percent on September 3 on the view that inflation will ease to the bank’s 2 percent target by late 2009.

“These are close enough to expectations that it doesn’t make a big impact on the Bank of Canada view,” said Doug Porter, deputy chief economist at BMO Capital Markets.

“For the doves out there, the good news is that there wasn’t a high-side surprise like there was in the U.S.”

U.S. core consumer prices and producer prices jumped more than expected in July, rattling financial markets.

In Canada, signs that economic growth is slipping and commodity prices are coming off record highs have led to forecasts of tamer inflation in the months ahead.

Some economists expect rate cuts by the bank as soon as the fourth quarter of this year or early 2009.

“In the balance between cutting and hiking, cutting is the more likely and pausing is probably the most likely yet,” said Eric Lascelles, chief rates and economics strategist at TD Securities.


Canada’s central bank forecast in July that energy prices would drive up the inflation rate to 3.8 percent in the third quarter, peaking at 4.1 percent in the fourth quarter before slowing next year.

“In terms of the Bank of Canada, they will continue to be concerned about the high overall number and the risk that it could start upwardly impacting inflationary expectations, but it can take some comfort that, to date, little evidence of that pass-through seems to be taking place,” said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

The Canadian dollar and bonds were little changed after the release of the data.

World oil prices jumped to a record high last month, and as a result Canadian consumers paid 29 percent more at the pump than in July of last year.

Natural gas and other fuels also rose at double-digit rates but the overall increase in transportation costs was 6.1 percent, muted by a 9 percent decline in vehicle purchase and leasing prices.

Upward pressure on prices also came from mortgage interest costs, up 8.5 percent on the year but down from 9 percent in June due to a softening of new housing prices, Statscan said.

Oil prices climbed for a third straight session on Thursday to US$117 a barrel but were still down sharply from a record high of US$147.27 reached last month.

The softer commodity prices have lessened the “significant concerns about inflationary pressures,” Finance Minister Jim Flaherty said last week, adding that he took “some comfort” in the trend.

Reporting by Louise Egan; editing by Ted Kerr

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