Canada’s inflation eases in July; BoC may need to keep current low rate setting in place until 2018

Canada’s inflation eased a bit in July to 1.3 percent year-on-year from June’s 1.5 percent as Canadians paid less for fuel. Excluding the impacts of the most volatile price categories, the Bank of Canada’s core inflation measure continued to remain stable at 2.1 percent year-on-year for the third straight month.

Overall, inflation in the country has remained calm and predictable in the recent months. The highest inflation is seen in durable goods such as appliances, cars and furniture. Inflation in durable goods is running at 3.5 percent year-on-year, reflecting a bigger share of imports in this category and past weakness of the CAD.

Markets might be concerned regarding performance of Canada’s economic growth; however, underlying inflation is not causing any concerns. The monetary policy object of BoC is to maintain low, predictable and stable inflation, said TD Economics in a research report. The Bank of Canada, in recent years have been successful in giving sufficient stimulus to assist in countering negative effect of the slowdown of oil sector.

“We expect that the Bank will need to keep the current low rate setting in place until at least 2018, as the opposing forces underneath the surface in Canadian inflation continue to net out to its 2% target”, added TD Economics.

Looking at details of July inflation report, gasoline continued to exert downward pressure on headline inflation in the month. On a year-on-year basis, prices at pump dropped 14 percent. Stripping the effect of gasoline prices, inflation in Canada would have been 1.9 percent in July, same as in June, according to TD Economics. Decline in clothing prices also led to downward pressure on prices. Clothing prices fell 0.4 percent year-on-year.

Food and recreation, education and reading were the only major categories that witnessed solid price pressures in July. Overall, food inflation is controlled at 1.6 percent; however, price pressures for items such as fish and meat resulted in higher food inflation in July.

Meanwhile, core inflation remained stable again in July. This trend has continued for around two years, as higher inflation for several durable goods is being partly countered by lower prices for nondurable goods. In the meantime, services inflation continues to be quite well behaved at nearly 2.1 percent.