OTTAWA – Canada's inflation rate in June decelerated for the fourth time in five months and rose at its slowest pace since the fall of 2015, as Canada joins the U.S. and other developed-world economies in dealing with the conundrum of weak pricing pressure amid improving growth prospects.
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Canada's all-items consumer-price index in June increased 1% from a year earlier, Statistics Canada said Friday, following a 1.3% advance in the previous month. June's result fell below already tepid market expectations for a 1.1% gain, according to economists at Royal Bank of Canada.
On a month-over-month basis, CPI in June declined 0.1%.
Lower energy and gasoline prices from a year ago were the main downward contributors on June CPI. Excluding energy, total inflation in Canada rose 1.2%.
Meanwhile, the average rate of annual core inflation, based on three gauges used by the Bank of Canada, rose 1.4% in June, compared to 1.3% in May. The three measures -- which aim to get a better read on underlying price pressures in the economy -- ranged from 1.2% to 1.6%.
Previous weak inflation readings didn't stop the Bank of Canada last week from lifting its benchmark interest rate by a quarter-percentage point, to 0.75% from 0.50%, or the first rate increase in seven years. Canada's central bank sets rate policy to achieve and maintain 2% inflation.
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The central bank said rock-bottom rates were no longer necessary because of an improving economic outlook, and that unused labor and production capacity was being soaked up at an accelerated pace. The gradual removal of slack from an economy should lead to upward pricing pressure, as more people find work and have more money to spend on goods and services.
"Over all, strong growth, low inflation is a familiar theme for Canada -- and a mix that leaves the Bank of Canada able to take rate hikes slow from here," said Avery Shenfeld, chief economist at CIBC World Markets.
Also on Friday the data agency said retail sales in Canada rose 0.6% in May from April, on stronger demand for automobiles.
Bank of Canada Gov. Stephen Poloz has tried to play down concerns over low inflation, arguing they are largely due to temporary factors, related to the cost of energy and automobiles. He said the Bank of Canada's job is to target "future" inflation, and its forecast has price increases returning close to 2% by mid-2018, as temporary factors fade and the price of food picks up steam.
Canada isn't alone in dealing with surprisingly weak inflation. The U.S. Federal Reserve is expected to stand pat on its policy rate next week, as its inflation rate drifts further away from 2% and the slowdown appears more broadly based than officials originally suggested. This week, the Bank of Japan pushed back the date when it expects inflation to hit 2%, which it now expects in March, 2020.
The Bank of Canada said in its most recent quarterly forecast that other, broader factors could be at play in slowing down price increases -- most notably the increased use of automation by firms; the rise of e-commerce, which has forced traditional brick-and-mortar retailers to cut their prices; and a permanent, downward revision to inflation expectations, fueled by negative fallout from the 2008-09 financial crisis.
June's inflation report showed seven of the eight components Statistics Canada tracks recorded increases in prices.
Electricity prices fell 5.3% in June from a year ago, after a 5.5% annual drop in May. This is largely attributable to a move by the government of Ontario -- Canada's most populous province -- to legislate lower power prices for households. Gasoline prices fell 1.4%.
Total food prices rose 0.6% from a year ago, after posting eight straight monthly declines. The homeowners' replacement cost -- or the price to maintain a residence at its current market value -- rose 4.1%.
Over all, the price of goods fell 0.5% in June from a year ago, whereas the cost of services -- such as a haircut and legal advice -- advanced 2.4%.
On a seasonally adjusted basis, Canada's CPI was unchanged in June from the previous month.
Write to Paul Vieira at firstname.lastname@example.org
(END) Dow Jones Newswires
July 21, 2017 09:35 ET (13:35 GMT)