The pace of inflation eased in July as increases in the price of gasoline slowed, giving the Bank of Canada room to keep interest rates at their exceptionally low levels.
Statistics Canada said Friday the consumer price index rose at a annual pace of 2.7 per cent in July, down from a 3.1-per-cent increase for June.
It was the first time that inflation was below a pace of three per cent since February. TD Bank deputy chief economist Derek Burleton said the "inflation genie" appeared to remain tucked in the bottle.
"It will give the Bank of Canada some wiggle room to keep rates low during this period of global uncertainty," Mr. Burleton said.
"The thinking has shifted now to the fact that economic growth is probably going to slow and the fact that core inflation is still below the Bank of Canada's target (of 2 per cent) means that inflation really isn't a major risk at the moment."
The core index, which is used by the Bank of Canada to help guide its decision on interest rates, gained 1.6 per cent following a 1.3-per-cent gain in June. On a month-over-month basis, the core index was up 0.2 per cent in July, in line with economist expectations.
BMO senior economist Sal Guatieri noted that the core rate appeared to be on track to fall short of the Bank of Canada's estimate of 1.9 per cent for the third quarter.
"While Canadian inflation has been more volatile than usual of late, core inflation looks to settle just below the two per cent inflation target, providing an anchor for the headline rate to gravitate toward," Mr. Guatieri wrote in a note to clients.
"The tame core reading will buy the Bank of Canada time to remain on the sidelines, and is clearly no obstacle for rate cuts should global recession risks intensify."
Energy prices were the main driver of the increase, gaining 12.9 per cent compared with a year ago. However, that was down from a 15.7-per-cent increase for June. Gasoline prices were up 23.5 per cent compared with a year ago, compared with a 28.5 per cent increase in June.
Food prices were up 4.3 per cent, matching the increase in June.
Excluding food and energy prices the consumer price index increased at a pace of 1.2 per cent for July, compared with a 1.4 per cent increase for June.
July was the first month to compare prices with a year ago that included the introduction of the harmonized sales tax in Ontario and B.C. as well as a two percentage point increase in the tax in Nova Scotia.
The inflation report came as Finance Minister Jim Flaherty and Bank of Canada governor Mark Carney appeared before the House of Commons finance committee.
The men were called to testify after more than a week of volatile trading on stock markets around the world due to fears of a sovereign debt crisis in Europe and worries the U.S. may slip back into recession.
Last week, the U.S. Federal Reserve said it would look to keep its key interest rate near zero through the middle of 2013. The low rates in the United States will put more pressure on the Bank of Canada to keep borrowing costs on hold north of the border as well.
There had been recent speculation that the Canadian central bank would begin raising rates this fall to curb inflationary pressures in the Canadian economy, which has been growing faster than the United States.
However, economists say the recent stock market turmoil and the fears of a double-dip recession in the United States has made it likely that rates won't rise in Canada until next spring at the earliest.