Canadian Inflation Surges to Fastest Since 2003 in May Driven by Gasoline

Canada’s inflation rate unexpectedly accelerated in May to the fastest since March 2003, sparking the biggest gain in the country’s currency this month as investors increased bets the central bank will raise interest rates.

The consumer-price index rose 3.7 percent from a year earlier, Statistics Canada said today in Ottawa, exceeding all 24 forecasts in a Bloomberg survey of economists. The median estimate was for a rate of 3.3 percent in May, matching the increases in March and April.

Bank of Canada Governor Mark Carney said June 22 that energy costs and temporary effects such as provincial sales-tax increases will keep inflation above 3 percent “in the short term.” Price gains will slow to a 2 percent pace by mid-2012 when the economy will be operating at full output, he told the Senate banking committee.

The report is “confirming less slack in the economy than the Bank of Canada thinks,” said Sheryl King, head of Canada economics at Bank of America Merrill Lynch in Toronto. “The risk is they go earlier than October” to increase the policy interest rate, she said.

The Canadian dollar appreciated as much as 1.2 percent to today to 96.97 cents per U.S. dollar, the biggest gain since May 31. The currency traded for 97.32 cents at 9:52 a.m. in Toronto, from 98.12 yesterday. One Canadian dollar buys $1.0276.

Yields Rise

The yield on the two-year Government of Canada bond increased 6 basis points to 1.51 percent, and the December bankers acceptance contract yield rose to 1.44 percent from 1.40 percent.

The core inflation rate, which excludes eight volatile items such as gasoline, accelerated to a 1.8 percent year-over- year pace in May. Economists forecast it would slow to 1.5 percent from April’s 1.6 percent advance.

Quicker price gains were led by gasoline and were seen in every major category except shelter, Statistics Canada said.

“Gasoline prices rose 29.5 percent, the largest increase since September 2005, when prices rose in the aftermath of Hurricane Katrina,” Statistics Canada said. Excluding gasoline, inflation accelerated to 2.4 percent from 2.2 percent.

Prices for food bought at stores rose 4.2 percent in May from a year earlier, faster than April’s 3.7 percent pace, the statistics agency said. “Prices increased for many staples, such as meat, bread and fresh milk,” the agency said.

Clothing and footwear prices rose 1.1 percent in May from a year earlier.

Profit Margins

Lululemon Athletica Inc. Chief Financial Officer John Currie said at a June 14 presentation that rising wages and material costs would reduce profit margins by as much as 2.5 percentage points in the second half of the year.

“Everybody’s talked about inflation, whether it’s in terms of cotton, oil-based products, also labor rates in China and elsewhere,” Currie said. The company is based in Vancouver.

On a monthly basis, consumer prices rose 0.7 percent in May from April, and the core measure rose 0.5 percent. Economists forecast monthly inflation of 0.3 percent and core prices rising 0.2 percent, according to surveys.

Tomorrow, Statistics Canada will probably report that gross domestic product shrank 0.1 percent in April, according to the median of 22 responses in a Bloomberg survey. Carney said last week that growth this quarter may be less than the bank’s previous projection of 2 percent on an annualized basis, and that Greece’s fiscal crisis is a risk to the recovery.

‘Tip the Balance’

Today’s inflation figures will “tip the balance a little bit towards the domestic” risks from external ones, said Dawn Desjardins, assistant chief economist at Royal Bank of Canada in Toronto. She predicts a September rate increase.

The cost of funerals, smartphones and retail-club memberships are being reflected in Canada’s inflation index for the first time today as Statistics Canada adjusted the measure to reflect changing consumer habits. The content of the so- called basket of household items is being slightly altered, and the relative importance of items will now be based on 2009 spending patterns instead of 2005 weights. The basket is updated every four years, a job the agency may start doing more often.

“The pace of technological progress and changes in the marketplace seem to be occurring a lot faster,” Marc Prud’homme, a senior economist in the consumer prices division, said in a telephone interview before today’s release. “Sometime in the near future, we might be increasing the pace at which we upgrade our basket.”

The changes are neutral when it comes to how inflation will behave in the future, Prud’homme said. “It’s based on results from consumer expenditure surveys that determine how much people spend on milk, how much they spend on eggs, rent,” he said. “If people are buying a lot of iPods, for example, we do want that to be reflected in the consumer price index basket.”

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

To contact the editors responsible for this story: David Scanlan at dscanlan@bloomberg.net; Christopher Wellisz at cwellisz@bloomberg.net.

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