Cheaper energy pulls Canada's inflation rate down to 2% in June

Canada's consumer price index rose at a two per cent annual pace in June, as the price of just about everything except energy went up.

Statistics Canada reported Wednesday that prices forfood, shelter, clothing, home furnishings, services,insurance, new cars, to name a few, have risenin the past year. But the overall inflation rate fell to two per cent in June from 2.4 per cent the previous month, mainly because of a precipitous drop in energy prices compared with this time last year.

Across Canada, gasoline prices have fallen by 9.1 per cent overthe past 12 months, but the price of fuel oil and other fuels has also fallen, by 4.1 per cent over that same period. Natural gas and electricity prices rose a little, but they were offset by much cheaper prices for every other type of energy.

Part of the reason for cheaper energy is rising inventories in the U.S. are driving down prices, but also, Alberta's scrapping of its carbon tax at the end of May helped cause a one-time drop in energy prices on a year-to-year basis.

Gasoline prices are always a "swing factor" in the inflation numbers, Bank of Montreal economist Doug Porter said, which is why most gauges of the actual cost of living tend to strip them out. But with an overall inflation rate of two per cent, "inflation can't really be described as 'tame' when one drives away from the gas station," he said.

Energy prices have fallen in every province, from a big drop of 12.7 per cent in Albertato 3.6 per cent in Ontario, over the past 12 months.

A few other small categories saw prices decline in the past year, including internet services, digital equipment and traveller accommodation.

But big jumps in the price of most other things more than offset those modest declines. A huge17.3 per cent increase in the cost of fresh vegetables was among the biggest factors to the upside. Fresh vegetables saw their biggest price acceleration since January 2016, and the data agency said bad weather in farming regions was a big factor in that jump.

What it means for interest rates

The inflation rate is one of the biggestdata pointsthat the Bank of Canada looks at in setting its interest rate policy. The central bank adjusts its interest rate to nudge inflation into arange of between one and three per cent.

All things being equal, if itdeems inflation is too high, the central bank will raise its rate to cool the economy. If inflation is too low, the bank will cut, to stimulate the economy.

So the rate being bang on the mid-point of that range, at two per cent, is an argument in favour of the bank staying on the sidelines for now.

"With energy prices pulling back, inflation is right back on the two per centtarget," economist James Marple at TD Bank said.

"With trade tensions elevated and global central banks easing policy in response, the Bank of Canada is likely to remain on the sidelines and especially attentive to signs that global weakness is seeping into Canada."