August 19, 2009 / 11:11 AM / 8 years ago

Canadian prices plunge in July, but analysts yawn

OTTAWA (Reuters) - Consumer prices in Canada fell at the steepest rate in 56 years in the 12 months through July due to sharply lower energy costs, but analysts shrugged off the news, saying there was no risk of prolonged deflation.

<p>Shoppers walk out of a Calgary electronics store in Calgary, Alberta in this November 17, 2006 file photo. Canada's annual inflation rate hit a 56-year-low in July, when prices fell by 0.9 percent from a year earlier on sharply lower energy prices, Statistics Canada said on Wednesday. REUTERS/Todd Korol</p>

Overall prices dropped 0.9 percent year-on-year in July, Statistics Canada said on Wednesday, reflecting a 23.4 percent fall in energy prices. This was largely caused by a 28.3 percent decline in gasoline prices from July 2008 -- a trend that analysts said would soon reverse.

Market operators had expected a decline of 0.8 percent in July from July 2008. The actual figure -- the steepest drop since the 1.4 percent fall recorded in July 1953 -- is far weaker than the Bank of Canada’s target range of around 2 percent annual inflation.

“The year-ago comparison (on energy prices) has become much less favorable going forward, so we will see the headline rate of inflation move back to positive territory by the end of the year,” said BMO Capital Markets senior economist Sal Guatieri.

Analysts -- one of whom referred to “this yawner of an inflation report” -- noted the annual overall inflation rate excluding energy rose 1.8 percent in the 12 months to July.

The core annual inflation rate -- closely watched by the Bank of Canada -- dropped to 1.8 percent from 1.9 percent in June. The rate excludes the costs of volatile components such as fruit, vegetables, natural gas, fuel oil and gasoline.

“There is likely a greater emphasis on the core reading than the headline, given the distortion created by the picture on petrol ... the narrowness of the story does not suggest that Canada is experiencing broad-based deflation,” said HSBC Securities economist Stewart Hall.

“Nor is there a palpable concern for an inflationary spiral given the great amount of excess capacity sloshing around in an economy that is barely operating at three-quarter speed.”

The central bank has promised to keep its benchmark interest rate at a record low of 0.25 percent through June 2010, conditional on inflation staying under control.

“Unless there is a drastic change in inflation, monetary policy settings are likely to remain unchanged for now,” said Charmaine Buskas, an economics strategist at TD Securities.

Inflation in July fell by 0.3 percent from June, while the core rate was unchanged over the same period.

The Canadian dollar moved slightly higher on the data and continued to climb gently after the release of stronger than expected figures for Canada’s July composite leading indicator.

By 10.15 a.m. the Canadian dollar was at C$1.1047 to the U.S. dollar (90.52 U.S. cents), compared with C$1.1092 (90.16 U.S. cents) before the inflation data came out.

The leading indicator rose by 0.4 percent in July from June on strong performances by the housing sector and the stock market. The increase -- the first monthly advance since August 2008 -- was greater than the 0.2 percent rise predicted by market operators.

Six of the 10 components expanded in July, the most since May 2008.

Reporting by David Ljunggren; editing by Peter Galloway

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