UPDATE 2-Canada July consumer price rise softer than expected

* Annual inflation rate 1.8 pct vs 1.0 pct in June

* Core CPI rises 1.6 pct year-over-year

* Harmonized sales tax pressures prices
(Adds details)

By Louise Egan

OTTAWA, Aug 20 (BestGrowthStock) – A spike in energy costs and a
new consumption tax in some provinces pushed up Canadian
consumer prices in July, but inflation remained below target
and unlikely to add pressure on the Bank of Canada to hike
interest rates.

Statistics Canada said on Friday the consumer price index
rose 0.5 percent in the month, following a 0.1 percent fall in
June. Annual inflation was 1.8 percent, up from 1.0 percent in
June.

Analysts in a Reuters poll had forecast a 0.6 percent
monthly rise for an annual rate of 1.9 percent.

“CPI registered the impact of the (harmonized sales tax) so
we saw a sizeable increase though it is slightly below
expectations,” said Paul Ferley, assistant chief economist at
Royal Bank of Canada.

“However, on a core basis, which eliminates the impact of
those tax changes, there was greater-than-expected weakness,
resulting in a year-over-year rate of 1.6 percent. So we’ve
seen a moderation on a core basis.”

The Canadian dollar (CAD=D4: ) fell to a one-month low
against the U.S. dollar immediately after the data to C$1.0508
per U.S. dollar, or 95.17 U.S. cents, from C$1.0399 to the U.S.
dollar or 96.16 U.S. cents, at Thursday’s close.

Core CPI, which excludes volatile items and the effects of
tax changes, came in at 1.6 percent compared with market
expectations of 1.8 percent.

The Bank of Canada targets a 2 percent annual inflation
rate and relies on the core rate to assess underlying price
pressures.

“It is rare core CPI declines two consecutive months. That
is something the (Bank of Canada) will definitely notice,” said
Sebastien Lavoie, economist at Laurentian Bank Securities.

“Basically what that means at the end of the day is that
the softness in today’s CPI report certainly adds support to
the growing view that (for) October’s and December’s (rate)
decision, the bank might stay on the sidelines.”

The Bank of Canada’s next interest rate decision is on
Sept. 8. After successive rate hikes in June and July that left
the target for the overnight rate at 0.75 percent, markets were
split on the likelihood of a third increase next month.

Yields on overnight index swaps, which trade based on
expectations for the Bank of Canada’s key policy rate, are
pricing in about a 39 percent likelihood of a September rate
hike, down from nearly 54 percent just before the data.
(BOCWATCH: )

BLENDED SALES TAX BUMPS UP INFLATION

The introduction of a harmonized sales tax (HST) — a
blended federal-provincial tax — in both Ontario and British
Columbia was expected to cause price hikes starting in July as
consumers now pay taxes on a wider range of goods. Consumer
prices in the country’s most populous province, Ontario, jumped
2.9 percent annually compared with a 1.6 percent increase in
June.

The Bank of Canada has estimated the HST will cause a
temporary rise of 0.6 percent in the annual inflation rate, but
has said it will ignore the effect of the new tax when setting
rates.

Electricity prices soared by 9.8 percent in July from a
year earlier while gasoline prices jumped 4.8 percent. Energy
prices overall rose 7.9 percent in the same period.

Consumer prices also rose for homeowner’s replacement
costs, vehicle insurance and food purchased from restaurants.

Downward pressure on CPI came from mortgage interest costs
and clothing, Statscan said.
(Additional reporting by Howaida Sorour, additional writing by
Ka Yan Ng)

UPDATE 2-Canada July consumer price rise softer than expected