Market Wire - Canadian Inflation Misses Expectations, Loonie Drops

Canadian inflation hit another 40-year high last month, but decelerated as imported inputs - global food and energy costs - rose more slowly. Data released by Statistics Canada this morning showed consumer prices rising 8.1 percent year-over-year, with the month-over-month gain amounting to 0.7 percent, down from 1.4 percent in May.

This was lower than anticipated - markets expected headline prices to rise 8.4 percent, with core prices seen increasing 6.7 percent - and could imply that the May number represented a peak in inflation for this cycle.

Gasoline prices were up 6.2 percent month-over-month - weakening from the blistering 12 percent gain seen in May - and the overall energy sub-index climbed 3.9 percent. Food prices climbed 0.1 percent relative to the prior month. 

Shelter costs rose just 0.4 percent as home prices slumped and activity weakened. 

Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 5 percent. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

The loonie is trading sharply lower as two- and ten-year yield spreads between Canadian and US bonds narrow. 

Investors still expect the Bank of Canada to hike benchmark interest rates by another three-quarters of a percentage point in early September, but a further easing of inflation pressures is possible before then. Shipping rates, food costs, oil benchmarks, and gasoline prices have all fallen since early June, and the shelter index could drop further as tighter financial conditions remove air from the housing markets.