Annual inflation rate steady at 2.2 per cent in July, Canadian dollar slips

OTTAWA (CP) - Statistics Canada says the annual inflation rate was 2.2 per cent in July, the same as in June, amid higher housing costs.

Analysts said Tuesday's report will give the Bank of Canada breathing room for its September decision on interest rates. In the current credit crunch, a lending rate increase has become much less likely.

As markets digested the data, the Canadian dollar slipped more than half a cent at the opening. It was at 94.29 cents US after rising 0.65 of a U.S. cent on Monday.

Douglas Porter of BMO Economics said the central bank will like the inflation data.

"This benign result is clearly good news for the Bank of Canada and will give them greater comfort as they wait on the sidelines for the storm to pass at the Sept. 5 decision date (on interest rates)," he said.

The annual inflation rate for the consumer price index has been at 2.2 per cent since April.

The rising cost of home ownership contributed the most to inflation in July, while cheaper gasoline and computer equipment and supplies helped dampen prices.

The core inflation rate - which strips out volatile items and doesn't count changes to indirect taxes - was at 2.3 per cent after posting a 2.5 per cent increase in June.

The Bank of Canada likes to see the core rate - which it studies when setting interest rates - at just two per cent. But Porter said the core rate seems under control.

"While we've seen temporary dips before in Canadian core inflation in the past two years, only to see it come roaring back even stronger than before, it appears that trends will remain moderate for a few months yet."

On a month-to-month basis, prices edged up 0.1 per cent between June and July .

Higher prices for women's clothing, traveler accommodation and higher mortgage interest costs in July were largely offset by lower prices for cars and trucks, natural gas and fresh vegetables.

On an annual basis, though, the cost of home ownership continued to be the main driver for inflation, as it has been for four months. The cost of mortgage interest rose six per cent between July 2006 and last month, the largest increase since 2000. Without mortgage costs, the inflation rate was 1.9 per cent.

Homeowners' replacement costs - which cover worn-out structural portions of homes and are tied to new housing prices - rose 6.2 per cent in July after a 6.1 per cent jump in June.

Posted by Joe Samson

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