Inflation hits Bank of Canada 2% target for second straight month

FILE: Bank of Canada building in Ottawa (Photo By d.neuman from Ottawa, Canada – Bank of CanadaUploaded by Skeezix1000, CC BY-SA 2.0)

OTTAWA — Canadian annual inflation hit the Bank of Canada’s ideal target for a second straight month, providing a stretch of price stability that’s unlikely to weigh heavily on next month’s interest-rate decision.

The inflation number came in at two per cent last month, Statistics Canada said Wednesday, which kept it right at the mid-point of the central bank’s range of one to three per cent.

Compared with a year earlier, consumers paid less in July for gasoline, internet services and traveller accommodation, the report said.

Prices showed strength in other areas, including an 18.9 per cent increase in the cost of fresh vegetables compared to July 2018. The consumer price index also found higher costs, year-over-year, for auto insurance, mortgage interest and passenger vehicles.

The overall two per cent reading for July came in a few ticks above market expectations.

Royce Mendes, senior economist for CIBC Capital Markets, said the higher-than-predicted number was supported by a temporary spike in airline fares that he attributed to a methodological change by Statistics Canada. It also occurred last year, he said.

“The rise in inflation is really just a bit of a flash in the pan and, as a result, won’t do much to alter the thinking at the Bank of Canada,” Mendes said.

He added the bank is more preoccupied at the moment with economic growth, the impacts of the U.S.-China trade war and weakening global conditions than risks to the inflation outlook. The central bank’s next policy meeting is scheduled for Sept. 4.

The Canadian economy has continued to perform well despite mounting international concerns.

The report Wednesday also showed that core inflation, which excludes volatile items like gasoline, was once again close to target last month.

The average of Canada’s three gauges for core inflation, which are considered better measures of underlying price pressures, was 2.03 per cent, up slightly from a revised reading of two per cent in June.

On their own, the headline and core numbers don’t put immediate pressure on the inflation-targeting Bank of Canada to adjust interest rates. The central bank can move the interest rate as a tool to try and promote or cool off inflation.

But amid deteriorating global economic conditions related to the trade war, some economists have predicted governor Stephen Poloz will reduce interest rates this fall — and perhaps as early as Sept. 4. Other major central banks have already signalled a more dovish turn on monetary policy.

BMO chief economist Douglas Porter said at the very least Wednesday’s stronger-than-expected inflation reading “dims the odds of a September surprise” from the Bank of Canada, but that October’s option remains open.

“Inflation in Canada remains remarkably stable right around the Bank of Canada’s target, and looks to remain there for a spell,” Porter wrote in a research note to clients.

“With their measures of core also holding tight around the target, inflation is giving the bank no free pass to trim rates, although it’s also not so high as to block the door completely.

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Porter added that the Bank of Canada’s decision on rates will come down to its assessment of how trade risks will affect domestic growth.

A closer look at the inflation data for July shows gas prices took less of a year-over-year fall than in the previous month’s report. The smaller drop applied more upward pressure on the headline number as consumers paid more for gas in July compared with June.

By omitting pump prices, the agency said last month’s overall annual inflation number was 2.4 per cent.

Prices, the report said, increased in all eight of its major categories compared with a year earlier. However, annual price pressures in the services index slowed last month to 2.4 per cent, down from 2.8 per cent.

By region, consumer prices slowed the most in Manitoba and British Columbia, the report said. Statistics Canada attributed the deceleration in Manitoba to the July 1 drop in the province’s retail sales tax.

On a month-to-month basis, the agency said consumers paid 2.5 per cent less for telephone services in July compared with June. The drop followed pricing changes across the industry as wireless companies faced tougher competition.

The agency said the decrease in phone plan costs was offset somewhat by higher price tags on devices like smartphones and tablets. From June to July, the price of these devices rose 42.5 per cent.