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Canadian inflation surpasses BOC target for second consecutive month

H.S. Borji
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www.finances.com

Canadian inflation in June advanced at the sharpest rate in 28 months, a sign the Bank of Canada may have to reconsider its stance on low interest rates.

Canadian inflation in June remained above the central bank’s 2 percent target, Statistics Canada reported today in Ottawa. The consumer price index accelerated at an annual rate of 2.4 percent, following a gain of 2.3 percent in May.

Economists forecast consumer prices to increase 2.3 percent annually.

Month-on-month, consumer prices advanced 0.1 percent, following a gain of 0.5 percent in May.

June marked the third consecutive month inflation levels were at or above the Bank of Canada’s 2 percent target.

So-called core inflation, which strips away volatile products such as food and energy, increased at an annual rate of 1.8 percent, following a 1.7 percent hike in May. Economists forecast a gain of 1.7 percent.

Month-on-month, the rate of core inflation was unchanged in June, official data showed.

Compared to June 2013, consumer prices increased across all major categories, StatsCan reported. Energy prices increased at an annual rate of 6.7 percent. The cost of food increased 2.9 percent over the previous 12 months, as did the price of shelter. Healthcare and transportation costs increased at an annual rate of 2.2 percent.

Rising inflation will give the BOC more to think about at its next rate meeting. The BOC in recent months has downplayed the sharp rise in inflation, pointing to temporary factors such as higher energy costs.

The BOC held its overnight rate steady at 1 percent earlier this week and downgraded its outlook on the Canadian economy. The central bank also said it doesn’t expect the economy to return to full capacity until the middle of 2016. This outlook gives policymakers ample room to keep interest rates lower for a prolonged period.

In pushing back its timeline for when the economy is expected to return to full capacity, the BOC said it now expects the economy to grow 2.2 percent this year and 2.4 percent in 2014. These estimates are a tenth of a percentage point lower than previous growth estimates.

Canada’s economy advanced at an annual rate of 1.2 percent in the first quarter, as inclement weather disrupted economic activity in areas such as household consumption, business investment and government spending.

The surprising surge in inflation means the BOC is unlikely to reduce its overnight rate further, something it promised to do should the economy continue to stagnate. However, weak employment growth is one of many factors that will likely keep interest rates low for a longer period.

The Canadian economy lost 9,400 jobs in June, as the unemployment rate edged up to 7.1 percent. Employment growth has averaged just 6,000 per month since January.

In other data, Canadian wholesale sales increased sharply in May, advancing 2.2 percent to $52.6 billion. Economists forecast a modest jump of 0.6 percent. Higher sales were achieved in four subsectors representing 72 percent of all wholesale sales.

In volume terms, wholesale sales also increased 2.2 percent.

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