July 17, 2009 / 3:02 PM / 10 years ago

WRAPUP 1-Canada inflation turns negative, C$ holds steady

* Canada consumer prices fall 0.3 percent in year to June

* Downward turn ranks as steepest in over half century

* Inflation was 0.3 percent in June from May

* Data in line with forecasts; currency little changed

By Randall Palmer

OTTAWA, July 17 (Reuters) - Canadian consumer prices fell in the year to June for the first time since November 1994, and the downturn, reflecting lower energy prices, was the biggest in more than half a century, Statistics Canada said on Friday.

Consumer prices were down 0.3 percent from a year earlier and energy prices were 19.0 percent lower.

It was the largest year-on-year fall in prices since a 0.7 percent decline registered in August 1955. Consumer prices rose 0.1 percent in the year to May.

The figures, which were in line with analysts’ expectations, show that the change in consumer prices is moving even further outside the Bank of Canada’s target range of 1 percent to 3 percent annual inflation.

But using the central bank’s core measure, which strips out volatile elements and tracks underlying trends, inflation was close to the midpoint of that range, at 1.9 percent.

“The only real hit, that’s more of a psychological one, is that inflation is now technically in deflation mode,” said Eric Lascelles, chief economics and rates strategist at TD Securities. “That’s the psychological impact but beyond that nothing is all that surprising.”

Because the report was in line with forecasts there was little market reaction and no change to analyst expectations that the Bank of Canada will leave its benchmark interest rate unchanged at 0.25 percent when it sets rates next week.

Eight of 12 primary dealers in a Reuters poll on Friday said the slow pace of economic recovery will prevent the Bank of Canada raising the rate until after the first half of 2010. [ID:nTOR004779]

The Canadian dollar CAD=CAD=D3 moved to C$1.1173, or 89.50 U.S. cents, immediately after the data release from C$1.1178, or 89.46 U.S. cents, just before the data. It then strengthened further during the morning.

Statscan also said consumer prices rose by 0.3 percent in June from May, and core prices were unchanged. The annual and monthly figures for both total and core inflation matched forecasts in a Reuters poll.

The Bank of Canada had in April telegraphed its expectation that inflation would turn negative in the second and third quarters, before returning to positive territory in the fourth quarter.

“We’re likely only to have negative inflation ratings for a few short months before we move back close to where the Bank of Canada would be comfortable with,” said BMO Capital Markets deputy chief economist Doug Porter, noting that the move had been caused by gasoline.

“It makes for great headlines that the overall inflation rate has dipped into negative territory for the first time since 1994, but the fact is that core inflation has been surprisingly stubborn and has moderated only slightly. If anything, core inflation has been above what the Bank of Canada has expected.”

The United States saw a similar inflation picture in June, with prices falling 1.4 percent year on year, the biggest decline since 1950. Gasoline prices were again the reason.

In Canada, gasoline prices fell 24.3 percent between June 2008 and June 2009. Natural gas and fuel oil also fell. May’s annual inflation rate was +0.1 percent.

Statistics Canada also said the composite leading index fell by 0.1 percent in June, mirroring May’s decline. It was much smaller than falls of 1.0 percent or more in the first four months of the year, but marked the 10th straight decline. (Additional reporting by Frank Pingue, Scott Anderson and Nina Lex in Toronto; Editing by Janet Guttsman)

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