World Economy

Canada Economy Falters on Stalled Inflation

Consumer prices rose just 0.1% in May, down from a 0.3% gain in April.Consumer prices rose just 0.1% in May, down from a 0.3% gain in April.

Canada’s economy showed unexpected weakness in the second quarter, recording sluggish readings for both inflation and retail sales.

The consumer price index recorded an annual pace of 2.2% in May, unchanged from April and well below economist expectations for a 2.6% gain, Statistics Canada said Friday. In a separate report, the Ottawa-based agency said retailers recorded a 1.2% sales drop in April, also unexpected, Bloomberg reported.

The reports—which come on the heels of other disappointing data—raise questions about the underlying strength of the economy and could cast some doubt about how quickly the Bank of Canada proceeds with future rate hikes.

“The soft patch in Canadian data continued today,” Royce Mendes, an economist at CIBC World Markets, said in a note to investors.

The Canadian dollar fell after the reports, and was down 0.2% to C$1.3342 per US dollar in Toronto trading. Investors pared their expectations for rate hikes this year. Swaps trading suggests a 54% probability of a hike at the Bank of Canada’s next rate decision on July 11, down from about two-thirds earlier in the day. A hike isn’t fully priced in until October, with chances of a second hike by December below 50%.

As recently as last month, more than two more rate hikes had been priced in this year, adding to the three increases the Bank of Canada has already taken.

The “bad data make it even more difficult for the Bank of Canada to hike rates in July,” said Mendes. There is “still time for the data to turn” before the next rate decision with the April GDP release and June employment data due before then, he said.

The inflation numbers were a major surprise given economists were anticipating a sharp pick-up in prices in May on the back of higher gasoline prices. However, a sharp decline in telephone services and cars last month acted as a brake on inflationary pressures coming from higher gas prices, the effects of minimum wage increases and higher mortgage rates.

On the month, consumer prices rose just 0.1% in May, down from a 0.3% gain in April and well below expectations for a 0.4% gain, Statistics Canada reported.

Core measures of inflation—seen by officials as a better gauge of underlying inflation trends—posted their lowest readings since January.

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