Canada Inflation Slows to 1% in June, Core Rises: Key Takeaways

(Bloomberg) 

Canada’s inflation rate fell to 1 percent in June, the slowest since October 2015 on declines in energy and clothing, while core measures accelerated. Retail sales rose 0.6 percent in May, twice as fast as economists predicted.

Statistics Canada said Friday the average of three measures of core inflation picked up from a May rate that was the slowest since 1999. Total inflation in the quarter fell below the central bank’s projection.

Key Points

The consumer price index rose 1 percent in June from a year ago, Statistics Canada said. The inflation rate was 1.3 percent in May. Economists surveyed by Bloomberg forecast the total rate would rise 1.1 percent in June.• On the month, consumer prices fell 0.1 percent in June from May, matching economist forecasts.• The average of the Bank of Canada’s three core inflation measures was 1.4 percent, rising from a 1.3 percent pace in May that was the slowest since 1999.• The third straight gain in retail sales was led by a 2.4 percent gain at motor vehicle and parts dealers.• Retail sales volumes are up 6.4 percent from a year earlier, the largest increase since 2010.

Big Picture

Bank of Canada Governor Stephen Poloz raised interest rates for the first time in seven years this month, saying inflation is being held down by temporary factors and will move back toward his 2 percent target by mid-2018. The Governor also said future policy moves depend on fresh data that informs the inflation outlook.

The June figure means second-quarter total inflation averaged 1.3 percent, lower than the central bank’s latest forecast of 1.4 percent. The central bank projects CPI will trough at 1.3 percent in the third quarter before moving higher.

Reaction

The Canadian dollar rose 0.3 percent to C$1.2557 per U.S. dollar at 8:49 a.m. Toronto time.

Faster core inflation “should be encouraging for the Bank of Canada and put all the CPI naysayers to rest for one month at least,”  Benjamin Reitzes, a Canadian rates and macro strategist at BMO Capital Markets, said by phone from Toronto. “On the retail sales, volumes were up 1.1 percent, that’s what counts.” The figures suggest the Bank can still raise interest rates in October, he said. “October is still a very reasonable call for the Bank.”

Other Details

• For the three so-called core measures, the ‘common’ core rate was 1.4 percent, the ‘median’ core rate was 1.6 percent and the ‘trim’ measure was 1.2 percent.• Prices for energy fell 1.3 percent, and for automobiles declined 0.2 percent, the first drop since February 2015. The Bank of Canada estimated those two components shaved 0.7 percentage points off the inflation rate in the second quarter.• Food costs rose 0.6 percent, breaking a string of eight previous declines. The central bank has also said intense retail competition is holding down prices more than may be justified by a decline in the cost of agricultural products.