The Canadian Consumer Price Index rose at a 1.3% annual rate in June, up from 1% in May. Just over half of the rise in June was the result of higher cigarette prices.

The relatively light inflation report has some economists thinking that the Bank of Canada will ease off on hikes to Canadian interest rates.

“If you ask a smoker, June was a costly month, but strip out the effects of a new tobacco tax and inflation was relatively subdued,” notes CIBC World Markets. Headline consumer prices rose 0.3% in the month, toward the upper end of consensus expectations. On an annual basis, the CPI is running at 1.3%. “But core inflation trends recorded a much-anticipated easing in June, another signal that we may have seen the last Bank of Canada rate hike this year,” says CIBC.

TD Bank economists disagree. “Price pressures may not be percolating to any great extent in Canada, but nor are they diminishing to a point that would allow the Bank of Canada to post a ‘gone-fishing’ sign on the doors of its twin glass towers in Ottawa,” says TD. “Although today’s favourable dose of inflation news will not heap any additional pressure on the Bank of Canada to raise interest rates another notch on its next policy announcement date on September 4th, it is also unlikely to shift the Bank off its recent course of monetary tightening — an idea that should come through in tomorrow’s Update to the Monetary Policy Report.”

Statistics Canada estimates that a little more than half of June’s increase was due to a tobacco tax hike. The alcohol and tobacco component is up at a 17.7% annual rate. “However, the other major CPI components have been remarkably well behaved. In seasonally-adjusted terms, only health and personal care managed to increase by more than 0.1%,” observes CIBC.

“Most important is the fact that core inflation continues to sit stubbornly above the Bank of Canada’s 2% target, at a time when it is still concerned about the strong staying power of the economy and when interest rates remain at highly stimulative levels,” concludes TD. “For the Bank to remain on hold in September there would need to be harder evidence over the next month and a half that the economic recovery in Canada is beginning to falter above and beyond the weaker-than-expected reports on international trade and retail sales released over the past week.”

“The Bank of Canada can take some comfort in the modest decline in the year-over-year CPIX reading, and the muted headline price increase. However, inflation is still expected to rise toward 3% in the months ahead,” says BMO Nesbitt Burns. “We’ll get a full reading on the Bank’s inflation forecast in tomorrow’s Monetary Policy Update.”