If Bank of Canada Governor Mark Carney is looking for a reason to raise interest rates, he won't find it in July's tame inflation numbers.
Lower prices for clothes, cars and airfares kept a lid on the consumer price index in July, which rose at an annual rate of 1.3 per cent. That is off from June's 1.5-per-cent pace and below the central bank's own inflation forecasts.
Mr. Carney has been preparing the ground in recent weeks for an eventual return to higher interest rates.
But most economists still don't expect a rate hike until well into next year. And the July CPI reading suggests there's no particular urgency.
"The Bank of Canada's tightening bias is increasingly looking untenable," National Bank of Canada economist Krishen Rangasamy argued in a research note.
He pointed out that both overall inflation and core inflation, which excludes volatile food and energy prices, are running below the central bank's estimates.
The July CPI challenges the rationale of Mr. Carney's recent "hawkish rhetoric," Scotia Capital Inc. economist Derek Holt argued.
He pointed out that the central bank acknowledged this week that the CPI probably overestimates inflation by as much as a half a percentage point.
So inflation may be running at an annual rate of less than 1 per cent, he said.
Investors should brace for "further softening" in Mr. Carney's guidance when the Bank of Canada releases its next monetary policy statement Sept. 5, Mr. Holt added.
The one wild card on the inflation front is the price of food, which is expected to spike over the next few months as the effects of the severe drought now plaguing the North American farm belt ripple through the food chain.
Corn and soybean futures have spiked to near-record highs in recent weeks amid fears that as much as a quarter of the crop could be ruined, and farmers are already paying more for animal feed.
Nomura economist Charles St-Arnaud said that while inflation isn't a problem now, the severe drought is likely to produce a "sharp rise" in food prices over the next several quarters.
As a result, Mr. St-Arnaud does not expect the Bank of Canada to change its tightening bias any time soon.
Higher food prices could be offset by lower prices for other commodities, such as oil, as the global economy slows.
Mr. Carney has been talking since April about raising the central bank's key interest rate, now set at 1 per cent.
But most economists aren't expecting him to move until mid-2013 as global uncertainty and economic weakness at home keeps the economy from gaining too much traction. The Bank of Canada has a 2-per-cent target for inflation.
The core inflation rate also eased in July to a 1.7-per-cent rate, compared to a 2-per-cent annual rate in June. Clothing, gasoline and energy prices were are all lower. Shelter, food, health care and household items were all higher.