Inflation rise not cause for concern

At 1.5%, June rate is below predictions and economists say it isn’t a problem

OTTAWA – Canada’s annual inflation rate rose slightly to 1.5 per cent last month, but most consumer prices stayed well in check and there were few signs of building cost pressures in any region of the country.

Statistics Canada said increases in the price of passenger vehicles, electricity, food, and homeowners’ replacement costs were mostly responsible for June’s slightly higher rate, which was up three-tenths of a point from May.

Economists had actually projected an even greater uptick given May’s extremely low reading of 1.2 per cent.

But they also cautioned that most of the increase would be temporary, caused by unusual base-effects from a year earlier when gas prices were receding and auto dealers launched an aggressive program of discounting.

The agency noted that discounting occurred this June as well – with car prices 2.7 per cent lower than they were a month earlier – but less so than happened a year earlier.

As well, gasoline prices continued to trend downward this June by 3.2 per cent from May, but not as sharply as occurred last year at this time.

A truer picture of the inflation trend was reflected in the monthly measure, which saw the overall price of consumer goods and services Canadians regularly purchase fall by 0.4 per cent from May.

“Despite the many moving parts and all the dire headlines on food and energy, Canadian inflation remains remarkably stable, and one of the least of our economic concerns,” said Doug Porter, deputy chief economist with BMO Capital Markets.

Porter noted that food prices could become a concern down the road. A severe drought in the U.S. has sent corn and soybean prices to record highs and put upward pressure on wheat.

“It’s a North American market for a lot of food prices, so that will find its way into the Canadian basket as well,” he explained. “In the past we’ve found the lag could be as long as nine months, so this could become a big issue around the turn of the year.”

Earlier in the week, the Bank of Canada said it expects overall headline inflation to remain below its two per cent target for about a year.

The central bank’s other measure – core inflation, which excludes volatile items like energy and fresh vegetables and fruit – bore monitoring as it rose two-tenths to two per cent, but still dead on the bank’s target line.

Analysts doubted bank gover nor Mark Car ney would spend many sleepless nights worrying about inflation, even core. Dismal global growth should keep any inflation pressures at a safe setting for some time, despite record low interest rates designed to pump up spending.

“With core inflation likely to continue hovering around the two per cent target given that the economy is operating close to potential, and new mortgage-lending rules expected to help cool down the housing market and household debt growth, the Bank of Canada is not feeling much pressure to alter the overnight rate,” said Dina Ignjatovic, an economist with TD Bank.

“We expect the bank to remain on hold until March 2013.”