Consumer inflation came in on the light side for June. Statistics Canada reported Tuesday that the headline Consumer Price Index rose 2.6% from June 2002 to June 2003, having registered monthly increases of only 0.1% in both May and June 2003.

The core rate fell 0.1% to a 2.1% annual rate. Economists see a greater chance of rate cuts on the news.

The numbers were softer than expected, and economists are looking for them to head even lower in the coming months. Bank of Montreal points out that the core rate is bolstered by earlier large increases in auto insurance premiums which are up 22.6% on a year-over-year basis. “Eliminating the impact of this component, the annual rate of increase in core prices would be a much more moderate 1.4%,” it says.

The headline rate was supported by large price hikes for natural gas. Meanwhile, the core rate came down due to lower prices in the motor vehicle and clothing sectors. “These declines likely reflect weakening demand,” says BMO.

“Looking ahead, we expect the core rate of inflation to slip below the Bank of Canada’s 2% target in July, and head down to the 1.3%-1.5% range by late year. Moreover, while prospects of deflation in this country remain remote, there is a downside risk to our forecast,” says TD Bank. “Most importantly, with the Canadian economy likely to post below-trend growth of about 2% over the next few quarters, a considerable amount of excess slack will build up, which will exert a drag on price increases. But, as well, the extent to which the stronger Canadian dollar’s impact on the prices of imported goods will spill over to retail prices is still an open question.”

“The Bank of Canada’s monetary policy update isn’t even a week old, and already the central bank’s inflation forecasts look high,” says CIBC World Markets. “Clearly, the CPI threat has been defused much quicker than almost anyone believed, with wilting economic growth robbing core prices of their earlier vigor. Both total and core inflation now stand on the verge of dipping below 2%, with the more important CPI-X measure likely to reside in the bottom half of the Bank’s 1% to 3% inflation target band in late-2003 and throughout 2004.”

“With the Bank of Canada having transformed from a hawk into a dove, this report reinforces the view that further rate cuts are in the offing,” says BMO Nesbitt Burns. “Not much debate here – these numbers are well on the low side of consensus, and are even lower than the Bank was likely looking for in last week’s policy report. If anything, both the headline and core measures are poised to drop more sharply in the next two months as big increases a year ago drop out of the calculation. The odds of another rate cut in September just took a big step forward.”

Based on this data, RBC Financial also now says that it believes that the next rate change will likely be a cut of a quarter point. “This report reinforces our view that the Bank of Canada’s next move will likely be a quarter point cut after which rates are on hold,” it says.

“Odds were already pretty good that the Bank of Canada would deliver another quarter-point interest rate cut on September 3, and this tame inflation report clearly helps solidify the case for incremental monetary relief even more likely,” says CIBC. “Note, however, that there remain a host of key economic reports to digest (including another reading on CPI) before September 3.”

Nesbitt is more bullish, saying, “However, we would put greater weight on the growth outlook as a more likely catalyst for further easing. Given that we remain of the view that activity in both Canada and the U.S. will bounce back over the second half of the year, we see the overnight rate remaining at current levels through to the spring of 2004.”