Data reinforce gradual rate hike

Inflation matched expectations, but was lower than target rate; retail sales rose for third month

The annual pace of inflation fell to its weakest rate in almost two years though retail sales rose for their third consecutive month, Statistics Canada said Friday, reinforcing expectations that any future interest rate hikes by the central bank will be brought in gradually.

Overall, the agency’s latest inflation report found that prices were just one per cent higher last month compared with a year earlier. The June number followed inflation readings of 1.3 per cent in May and 1.6 per cent in April.

The latest deceleration in inflation has moved the rate even further away from the Bank of Canada’s target of two per cent. It’s been dropping since February — the last time it posted a two per cent reading.

Some experts had pointed to weak inflation data as a reason for the central to bank to hold off on hiking its benchmark interest rate, despite signs the economy was building momentum.

However, the bank raised its trendsetting rate July 12 for the first time in nearly seven years. In doing so, the bank’s governing council said the inflation softness was mostly temporary and predicted the rate will be close to two per cent by mid-2018.

Several economists noted that Friday’s inflation numbers were unlikely to change the bank’s view, but did serve as a reminder that governor Stephen Poloz will continue tightening monetary policy — or raising rates — at a measured pace.

“It sounds like they’re still going to be pretty cautious in terms of hiking interest rates and this data is a reason that you don’t have to rush to hike,” said Nathan Janzen, a senior economist for RBC.

Poloz’s rate hike — to 0.75 per cent from 0.5 per cent — undid one of the two 25-basis-point cuts he introduced in 2015 as insurance following the collapse in oil prices.

There are widespread expectations the bank will increase the rate by 25 basis points again in October, which would essentially reverse the bank’s other 2015 reduction.

“That’s still very low by historical standards,” Janzen said.

The June inflation figure matched expectations from a consensus of economists that had predicted a reading of one per cent, according to Thomson Reuters.

Statistics Canada said lower gasoline prices last month were a primary contributor behind the slowdown, as pump prices contracted 1.4 per cent compared with a year earlier.

Electricity prices dropped 5.3 per cent over the same period, while other energy costs rose, including 10 per cent growth in natural gas and a 7.8 per cent increase in fuel oil and other fuels.