Data re­in­force grad­ual rate hike

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

The Hamilton Spectator - - COMMENT - ANDY BLATCH­FORD

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.

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