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 for food, shelter, clothing, home furnishings, services, insurance, new cars, to name a few, have risen in 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 over the 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.

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

What it means for interest rates

The inflation rate is one of the biggest data points that the Bank of Canada looks at in setting its interest rate policy. The central bank adjusts its interest rate to nudge inflation into a range of between one and three per cent.

All things being equal, if it deems 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 cent target,” 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.”