Canada's inflation quickens to 3.4%

Ottawa: Soaring gasoline prices drove Canada's inflation rate in July to its highest in more than five years, but the upswing was widely expected and did little to change the view that the central bank will keep interest rates on hold in September.

The annual inflation rate quickened to 3.4 per cent in July from 3.1 per cent in June, the highest rate since March 2003, Statistics Canada said.

But the core rate closely watched by the Bank of Canada stayed well within target at 1.5 per cent for the fourth straight month.

The consumer price index rose 0.3 per cent in the month, in line with market forecasts. But there was little evidence that high energy prices were trickling into prices of other goods as the core index, which excludes gasoline and other volatile items, advanced by a lower-than-expected 0.1 per cent.

No surprise

The inflationary pressure comes as no surprise to the Bank of Canada, which most market players expect to hold rates steady at 3 per cent on September 3 on the view that inflation will ease to the bank's 2 per cent target by late 2009.

"These are close enough to expectations that it doesn't make a big impact on the Bank of Canada's view," said Doug Porter, deputy chief economist at BMO Capital Markets.

"For the doves out there, the good news is that there wasn't a high-side surprise like there was in the US."

Canada's central bank forecast in July that energy prices would drive up the inflation rate to 3.8 per cent in the third quarter, peaking at 4.1 per cent in the fourth quarter before easing next year.

"In terms of the Bank of Canada, they will continue to be concerned about the high overall number and the risk that it could start upwardly impacting inflationary expectations, but it can take some comfort that, to date, little evidence of that pass-through seems to be taking place," said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

World oil prices jumped to a record high last month, and as a result Canadian consumers paid 29 per cent more at the pump than in July of last year.