UPDATE 2-Canada's inflation rate edges up, little rate pressure seen

Fri Aug 23, 2013 10:08am EDT

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By David Ljunggren

OTTAWA Aug 23 (Reuters) - Canada's annual inflation rate edged up to 1.3 percent in July from 1.2 percent in June, underlining how little pressure the Bank of Canada is under to increase rates, Statistics Canada data indicated on Friday.

Analysts had expected the rate to hit 1.4 percent. Although the July rate was the highest since the 1.3 percent recorded in July 2012, it was well below the Bank of Canada's 2.0 percent target.

The central bank, which has kept its key rate at a near-record low 1.0 percent since September 2010, said last month it would not hike rates as long as the inflation outlook remained muted and there was still significant slack in the economy.

"The big picture for Canadian inflation is that it is now gradually climbing from the depths of earlier this year, but it remains non-threatening - think Flipper, not Jaws," said Doug Porter, chief economist at BMO Capital Markets.

Porter said in a note to clients that a recent gradual decline in the value of the Canadian dollar would "add to the mild upward pressure in inflation, but a sluggish underlying growth profile for the economy and slow wage growth will restrain the upswing".

The Canadian unit briefly softened to a six-week low against the U.S. dollar on Friday, slipping to C$1.0569 to the U.S. currency, or 94.62 U.S. cents, after the data was released.

It later recovered some of its losses and by 9:45 a.m. (1345 GMT) it was at C$1.0547. or 94.81 U.S. cents. This was still weaker than Thursday's finish at C$1.0516, or 95.09 U.S. cents.

The increase in July's inflation rate was led by transportation prices, which rose 2.7 percent on a year-over-year basis, compared with 2.0 percent in June.

Gasoline prices advanced by 6.1 percent in the 12 months to July, compared with 4.6 percent in June.

The closely watched core inflation rate, which excludes prices for gasoline, some foods and other volatile items, rose to 1.4 percent in July from 1.3 percent in June.

A Reuters poll on July 10 showed economists do not expect the Bank of Canada to raise rates until the fourth quarter of next year.

"While the upward drift argues that the Bank of Canada's next move will still likely be to raise rather than lower rates, the overall muted inflation backdrop provides little pressure to make a change in the near-term," Nathan Janzen of RBC Economics said in a note to clients.

Food prices rose just 0.8 percent in the 12 months to July, the smallest year-on-year increase since June 2010.

Shelter costs rose 1.3 percent, while the health and personal care component fell 0.4 percent, the fourth consecutive monthly drop after a decade of price increases, thanks to falling prices for prescribed medicines.

Total inflation increased 0.1 percent in July from June.

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