Source: The Canadian Press

Not too hot, not too cold _ Canada’s inflation rate is about where Bank of Canada governor Mark Carney would want it leading into his next big decision on interest rates.

Statistics Canada reported Tuesday that annualized inflation dipped four-tenths of a point to 1.4% last month, and the central bank’s core index slipped one notch to 1.8%, well below the bank’s preferred target of two%.

With temporary factors the only major contributors to above-target inflation, analysts said Carney may still go ahead with his second interest rate hike in two months on July 20, but it won’t be because inflation is keeping him up at a night.

A BMO economist noted, however, that the Canada’s central bank is still charging a very low rate for overnight loans _ which are only available to a small number of very large financial institutions.

“It’s true this inflation rate is quite benign, but the bank’s overnight rate (0.5%) is below the inflation rate. That’s quite rare,” noted Douglas Porter, deputy chief economist with BMO Capital Markets.

“There’s no urgency, but over time the trend will be to get those interest rates at least back to inflation if not a bit higher.”

The big unknown is how fast and how high. Porter sees the central bank pausing after another quarter-point hike to 0.75% next month, while the TD Bank said Tuesday it believes Carney will bring the policy rate to 1.5% by year’s end, “barring any financial market flareups.”

CIBC’s Krishen Rangasamy said May’s soft prices report again underlines the sizable economic slack still present in Canada, despite two consecutive quarters of 4.9% and 6.1% growth.

The Bank of Canada believes growth is moderating, however, and the economy won’t return to full capacity until sometime in the middle of next year.

Most of the inflation numbers point to a moderating trend.

On a month-to-month basis, Canadians paid 0.3% more for goods last month than they did in April.

Excluding energy, the national inflation rate stood at a tepid 1%.

Overall, six of the major components tracked by Statistics Canada recorded price increases, most moderate.

Transportation prices rose 4.1%, largely due to gasoline, while shelter costs rose 1.3% as a 4.4% rise in the price of homes was offset by a 5.4% decline in mortgage interest costs.

Food prices, a key element of the index, went up a tame 0.8%, the smallest increase since March 2008.

The agency said gasoline prices were still 6.2% higher than they were 12 months ago, but that is a huge drop from the 16.3% difference that existed in April. On a monthly basis, gasoline was actually 0.5% lower in May than in April.

The only major inflation bump in the future will come in the next few months when Ontario and British Columbia move to a harmonized sales tax, but because it is a one-time adjustment, the change won’t affect the central bank’s thinking.

Gasoline prices have been skewing the inflation rate in Canada for the past two years in response to the historical acceleration in oil prices in the spring and summer of 2008, which was followed by an equally steep drop.

But in May, pump prices began exerting less of an influence in the rate as prices began falling roughly in line with where they stood last year.

The agency said pump prices were still 6.2% higher than they were 12 months ago, but that is a huge drop from the 16.3% difference that existed in April. On a monthly basis, gasoline was actually 0.5% lower in May than in April.

Overall, six of the major components tracked by the agency recorded price increases, most moderate.

Transportation prices rose 4.1%, largely due to gasoline, while shelter costs rose 1.3% as a 4.4% rise in the price of homes was offset by a 5.4% decline in mortgage interest costs.

Food prices, a key element of the index, went up a tame 0.8%, the smallest increase since March 2008.

Meanwhile, prices for clothing and footwear declined 1.3% on an annual basis, and recreation, education and reading slipped by 0.2%.

The agency said all provinces experienced positive inflation last month, but at a slower pace than the previous month. Inflation was highest in Ontario at 1.9%, and lowest in Manitoba at 0.5%.