Canada Inflation Rises Faster Than Expected in June

By Dow Jones Business News, 
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OTTAWA--Canadian inflation was stronger than expected in June, with the annual headline rate rising at the fastest pace since February 2012 and the key core measures up the most in two years.

The data showed a continued uptick in consumer prices seen in recent months and could make it more difficult for the Bank of Canada to maintain its recent assertion that the spike in the country's inflation is temporary.

In its interest-rate decision earlier this week, the Canadian central bank said the recent increase in consumer prices was due to temporary factors rather than any change in economic fundamentals. But it also chose to omit previous mention about the economic risks of low inflation. Governor Stephen Poloz said the central bank is maintaining a neutral policy bias amid "serial disappointment" with the global economy.

In June, headline consumer price inflation accelerated to 2.4% year-over-year from 2.3% in May, driven by higher costs for shelter, food and transportation, Statistics Canada said on Friday. The Core Consumer Price Index, which excludes some food and energy costs, rose to 1.8% from 1.7%.

On a monthly basis, the headline inflation rate slowed to 0.1% from 0.5%, as consumers paid less for clothing, electricity and cars. The core monthly measure declined 0.1% after a 0.5% gain in May.

Market expectations were for the annual headline and core rates to grow 2.3% and 1.7%, respectively, according to a report from Royal Bank of Canada. On a monthly basis, the headline rate was expected to be flat and the core rate to decline 0.2%.

The Canadian dollar firmed after the inflation data and the release of a separate report that showed an unexpectedly strong 2.2% increase in wholesale sales for May. Bond prices fell, driving yields higher.

The core CPI rate averaged 1.6% in the second quarter, matching the Bank of Canada's upwardly revised forecasts, unveiled on Wednesday. But the average headline inflation rate of 2.2% for the quarter was higher than its 2.1% forecast.

The central bank's new inflation forecasts for the third quarter already look at risk of being too low, according to BMO Capital Markets chief economist Douglas Porter.

He said comparisons to a year ago will get "very challenging" in coming months as prices were quite muted last summer. Mr. Porter said the three-month trend in seasonally adjusted core CPI is now clocking in at a 3% annualized pace, which is normally the top end of the central bank's comfort zone.

Still, the Bank of Canada remains preoccupied by downside risks to growth, so the latest upward drift in consumer prices will likely not prompt it to change its view, Mr. Porter wrote in a report.

"It ultimately does come down to growth," for any shift in the policy stance, and the strong wholesale sales data suggest "the Bank is in an interesting and potentially more difficult spot" on that front, according to David Tulk, chief Canada macro strategist at TD Securities.

Economists at CIBC World Markets said the Bank of Canada will likely wait for the U.S. Federal Reserve to act first before it change its dovish tone on interest rates, to prevent the Canadian dollar from taking flight. Currency strength "would be anathema to the export-led recovery it is trying to engineer," they wrote in a report. "As long as we don't see evidence of cyclically driven inflation, the Bank of Canada will have reason to look the other way."

Write to Nirmala Menon at nirmala.menon@wsj.com

07-18-141258ET

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This article appears in: US Markets , Economy , International

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