Canadian Consumer Price Inflation - June 22, 2012

Canadian consumer prices rose just 1.2 per cent in the 12 months to May, a sharp deceleration from a 2 per cent increase in April. The decline in inflation is largely attributable to falling energy prices which posted their first year-over-year decline since October 2009.  Natural gas prices were off 16.6 per cent while gasoline prices were 2.3 per cent lower.  The Bank of Canada's core inflation index, which excludes the eight most volatile components of the CPI like energy and food, rose 1.8 per cent.  Inflation in BC was also lower in May, registering an increase of 1.3 per cent.

With core inflation still lingering below target and economic data coming in weaker than expected, the Bank of Canada will now be under far less pressure to raise interest rates than it was earlier in the year. Moreover, yesterday's move by the Federal Government to tighten mortgage credit will have the same impact as a close to 1 per cent rise in interest rates on monthly carrying costs.  Given its concerns about rising household debt, this targeted action removes the need for the Bank to raise rates in the near term. We therefore do not anticipate any interest rate hikes from the Bank of Canada until early 2013. 

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