"We're looking at an annual inflation rate at 3%. Mostly this is an energy price story," said BMO deputy chief economist Doug Porter of the June Consumer Price Index report due out from Statistics Canada Wednesday. "I think core inflation is going to still look quite benign. We're calling for core inflation to stay at 1.5%"

Given the BOC predicted in its latest Monetary Policy Report Update that headline inflation will temporarily peak at 4% in the first quarter of 2009 and sent strong signals it will maintain its neutral stance on monetary policy, HSBC Canada market strategist Stewart Hall said the high June reading is unlikely to provoke a change of heart. Hall said overall June inflation will likely hit 3% on annual basis.

"The fact that they indicated (headline) inflation is expected to rise to 4% certainly steals a lot of the thunder from tomorrow's report," he said noting the BOC suggests the increase in overall inflation will be transitory. "It suggests there is no policy prescription to come off this heightened inflation profile, in the short term anyways."

Hall said that up until June, Canada has seemed to be an island unto itself, escaping much of the inflationary pressures confronting the rest of the world, thanks to the appreciation of the loonie. In a sense, June will simply mark the moment those inflationary pressures resulting from energy and food price increases caught up with Canada, he said.

While Hall said he didn't expect any large movements in the market in response to Wednesday's report, he said an unexpectedly high reading still might spark a move.

"I think where we run the risk of a market reaction is if the overall rate is moving up and we get a stronger than expected rise in the core rate. If the core rate were moving up to 1.7% or 1.8% that would raise concerns about higher energy prices feeding through into core inflation," said RBC assistant chief economist Paul Ferley. "That would raise the probability that they (the BOC) may have to raise rates at some point but I don't think it would prompt an expectation of an immediate move."

Ferley forecasted a 2.8% rise in overall inflation in June compared to June 2007 and said he expects the core rate to come in at 1.6%. He noted that the annual rate in May for headline inflation was 2.2% and the annual core reading in May was 1.5%.

On a monthly basis, Ferley said June's core reading should show a 0.1% increase while he said the overall inflation rate should hit 0.4% on a month-to-month comparison.

Ferley said that while June 2007 saw gasoline prices decrease, June 2008 has seen a significant rise at the pumps.

CIBC economist Meny Grauman said his bank believes overall inflation may peak higher than the BOC's forecast and said upward pressure from energy and food costs will be more sustained than the central bank predicts.

"We see high inflation well through our forecast period which ends in 2009, so this is not a temporary blip in our view," he said. Still, CIBC forecasts June's overall inflation reading will be 3% compared to June 2007 and core will hit 1.6% year over year. On a monthly basis, he forecast a 0.6% increase in headline inflation and a 0.1% uptick in the core reading.

By Sean McKibbon, This email address is being protected from spam bots, you need Javascript enabled to view it , edited by Cristina Markham, This email address is being protected from spam bots, you need Javascript enabled to view it

CEP Newswires - CEP News © 2008. All Rights Reserved. www.economicnews.ca

The Copying, Broadcast, Republication or Redistribution of CEP News Content is Expressly Prohibited Without the Prior Written Consent of CEP News.

A copy of CEP News disclaimer can be found at http://www.economicnews.ca/cepnews/wire/disclaimer.