Canada's Annual Inflation Rate Slows to 1.4% in May on Gasoline, Clothing

Canada’s annual inflation rate slowed in May because of a moderation in gasoline costs and lower prices for clothing.

The consumer price index rose 1.4 percent in May after a 1.8 percent gain in April, Statistics Canada said today. The core rate that excludes eight volatile items slowed to 1.8 percent from 1.9 percent. Economists forecast the inflation rate would be 1.3 percent and the core rate 1.7 percent, according to the median of 20 estimates in a Bloomberg News survey.

The Bank of Canada said in an April forecast paper that inflation will be “slightly higher” than its 2 percent target over the next year. Governor Mark Carney raised the bank’s key lending rate to 0.5 percent June 1 and said last week that future moves aren’t “preordained” because events abroad, including Europe’s debt crisis, could dampen future inflation.

“The base case view is that the situation in Europe has stabilized and the Bank of Canada is on track to raise rates again on July 20,” said Sal Guatieri, a senior economist at BMO Capital Markets in Toronto.

The bank needs to raise lending rates to “normalize policy and get rates to a level that’s more consistent with a healthy fully employed economy a year or two down the road,” he said.

Global Strains

Carney said June 16 he must “balance the competing influences on Canadian activity and inflation of momentum in domestic demand and the increasingly uneven global recovery.” Canada’s economy grew at a 6.1 percent annualized pace in the first quarter, the fastest in a decade.

Yesterday, the bank said that Canada’s financial system faces a higher level of risk because of global strains, including concerns that countries are taking on too much debt and an unbalanced economic recovery.

The rate on the two-month overnight index swap, a bet on what investors predict the central bank’s rate will average over that time, fell to 0.5936 percent today from 0.5958 percent yesterday. The Canadian dollar rose 0.2 percent to C$1.0227 per U.S. dollar at 8:14 a.m. in Toronto from C$1.0243 yesterday. One Canadian dollar buys 97.78 U.S. cents.

Retail gasoline prices rose 6.9 percent in May from a year earlier, compared with a 16 percent rate the previous month, Statistics Canada said today in Ottawa. The transportation index advanced 4.1 percent in May after April’s 6.2 percent increase.

Food costs rose 0.8 percent, the smallest increase since March 2008, as restaurant prices gained while fresh fruit and potato prices fell, the report said.

Clothing and footwear prices fell 1.3 percent because of lower prices for women’s and children’s items, the agency said.

On a monthly basis, consumer prices rose 0.3 percent in May, the same pace as in April. Core prices also rose 0.3 percent for a second month. Economists predicted an advance of 0.2 percent in the monthly overall rate and a 0.3 percent rise in the monthly core rate.

To contact the reporter on this story: Greg Quinn in Ottawa at gquinn1@bloomberg.net.

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