Grocery store owner Gilles Robin works on his fruits vegetable display on Nov. 28 2006 in the Breakeyville, Que.JACQUES BOISSINOT/The Canadian Press
The Canadian inflation genie is back in the bottle, at least for a while.
Price gains slowed markedly in June as car makers were forced to offer big discounts and gas prices, while much higher than a year ago, fell from lofty levels reached in the spring. Consumer-price inflation slowed to a 3.1-per-cent annual pace, Statistics Canada said Friday, after a 3.7-per-cent reading in May, which was the fastest since 2003. The "core" rate, which the Bank of Canada looks to as a guide to future trends because it strips out volatile items such as energy and some fresh foods, decelerated to a 1.3-per-cent annual pace, from 1.8 per cent.
Consumer prices fell 0.7 per cent on a monthly basis, and core prices dropped 0.6 per cent, Statscan said.
The figures surprised analysts, after May's readings added pressure on Mark Carney, the Bank of Canada governor, to acknowledge that domestic inflation seems on the march even as global economic risks intensify. The report suggests inflation is still manageable enough that Mr. Carney, who held his main interest rate at 1 per cent for a seventh consecutive time this week, can wait until the fall or later to hike rates, economists said.
On Wednesday, Mr. Carney said in a forecast that core inflation will briefly top his 2-per-cent target in early 2012, but pledged a cautious approach on rates because of economic "headwinds," such as the strong dollar, Europe's debt crisis and the underwhelming U.S. recovery.
Most observers expect the central bank to lift borrowing costs in October or December. A move at Mr. Carney's next rate decision, on Sept. 7, is viewed as less likely because there won't be enough evidence yet to convince him the Canadian and U.S. recoveries are on more solid footing, or that the European debt drama has abated.
Gas prices declined by 3.7 per cent in June on a monthly basis, Statscan said, leaving them almost 29-per-cent higher than in June, 2010. Prices for passenger vehicles fell 3.1 per cent, as manufacturers tried to woo consumers squeezed by high energy prices and leery of more debt, although there are early signs of a quick bounce-back for the industry.
The cost of staying in hotels fell 2.9 per cent from a year earlier, Statscan said - an indication of how gasoline prices and consumers' high debt loads are keeping inflation in check by curbing recreational travel and other discretionary spending.
"Preliminary auto sales suggest they bounced back by about 10 per cent at the start of the third quarter, so it's pretty safe to say that the sharp deceleration in core inflation is probably going to prove temporary, inflation should start to pick up and the economy should continue to recover," Diana Petramala, an economist at Toronto-Dominion Bank, said in an interview.
Still, Ms. Petramala said, TD is sticking with its call for Mr. Carney to stay on hold until January, since the threat of problematic inflation seems further off. The central bank could move earlier if the inflation readings boomerang again, she suggested, but now that there is less urgency to stem price gains, policy makers can move more slowly and monitor the external risks.
"They've abandoned their mechanical functions and they're focusing on risk management right now," she said.
On Tuesday, Mr. Carney's decision ignited speculation of a sooner-rather-than-later rate hike, because he dropped the word "eventually" from his timeline. The next day, though, he made it clear he plans to move carefully, using his forecast and press conference to outline a case for leaving rates low even if core inflation reaches 2 per cent, in order to "lean into" the headwinds.
Economists who have argued for much of this year that Mr. Carney should be in no hurry to respond to any monthly reading for inflation, because its impact could be dwarfed if the debt crises on either side of the Atlantic are mishandled, for instance, felt vindicated Friday.
"There are two camps of thought on the Bank of Canada," said Derek Holt, vice-president of economics at Scotia Capital. "One is that they should be in data-watching mode and sensitive to the near-term story. I don't buy that. I think instead they need to strengthen their belief with respect to a longer-term story.''