The Canadian inflation figures due out Tuesday are expected to be tame, but at healthy enough levels to keep the Bank of Canada on its rate-hiking schedule when it meets on July 20, economists say.

What are the expectations?

Overall consumer prices during May are forecast to have increased by 1.3 per cent on a year-over-year basis, compared with 1.8 per cent in April, according to a survey of economists by Bloomberg. The annual core rate of inflation, which excludes the eight most volatile items, is estimated at 1.7 per cent in May, compared with 1.9 per cent in April.

“There’s been little evidence the strong Canadian dollar has had any meaningful downward impact on prices,” said Benjamin Reitzes, an economist with BMO Nesbitt Burns Inc.

The muted inflation data in Canada are expected to reflect lower gasoline prices, reduced clothing prices and continued softness in mortgage interest costs, economists say. Those factors will likely be offset by rising house and car prices and higher electricity costs in Ontario.

How will the markets react?

“Inflation remains mild because of the economic slack that came courtesy of the recent recession,” but the excess capacity will decline as the economy improves, said Krishen Rangasamy, an economist with CIBC World Markets Inc. CIBC expects the inflation data will be higher than the consensus outlook, which would be positive for the Canadian dollar and negative for bonds because of the prospect of higher interest rates.

“Monetary policy isn’t about what prices were doing in May, 2010, but what the expectations are for prices in May, 2012,” said Stewart Hall, an economist with HSBC Securities (Canada) Inc.

The Bank of Canada’s policy is also not directed solely at inflation, Mr. Hall said. “I suggest that they can’t be blind to the effect of monetary policy on the economy.” The low level of interest rates instituted at the time of the credit crisis is encouraging consumers to borrow money and their debt is accelerating to very high levels, he said. “There’s a recognition monetary policy needs to encourage a change in consumer behaviour.”

Nevertheless, there are reasons to expect the pace of the Bank of Canada’s rate-hiking policy could prove to be slow, economists say. The rate-setting arm of the U.S. Federal Reserve Board, which begins its two-day meeting on Tuesday, is contending with the possibility of deflation and it is expected to hold to its zero interest rate policy. Meanwhile, governments in Europe are instituting aggressive budget austerity packages, that will likely slow the growth outlook.