Canadian inflation hit eight-year high in May increase, earlier, highest, higher, result

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Canadian inflation hit eight-year high in May


OTTAWA — Canadians faced their highest inflation rate in eight years in May, led by gasoline prices that were up nearly 30 per cent from a year earlier, Statistics Canada said Wednesday.


Consumer prices were up 3.7 per cent annually last month, well ahead of the 3.3 per cent that had been predicted by economists polled by Bloomberg.


"The increase in May was primarily a result of higher gasoline prices," Statistics Canada said in a statement.


Gasoline prices have been a driving force of inflation for several months. May marks the third-straight month that annual inflation has been more than three per cent, well above the Bank of Canada's target rate of two per cent.


Pump prices in May were 29.5 per cent more than they were a year earlier. That's the biggest gap since September 2005, when gas prices rose in the wake of Hurricane Katrina.


Statistics Canada said May's gasoline prices were nearing the all-time highs reached in July 2008.


If not for gasoline, inflation would have been 2.4 per cent, up from 2.2 per cent in April.


The core inflation rate, which factors out volatile items, such as energy and certain foods, was 1.8 per cent. Economists had anticipated 1.5 per cent. It was 1.6 per cent in April.


While the central bank aims for two per cent overall inflation, it uses the core rate as a guide for assessing underlying trends.


The Bank of Canada's overnight interest rate has been unchanged at one per cent — a low level by historical standards — since last September. Low interest rates, while used to stimulate economic activity, are also known to boost inflation.


"This could reopen the debate about a rate hike by the end of the year," BMO Capital Markets economist Robert Kavcic said of May's core inflation.

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He wasn't the only analyst taking note of the higher-than-expected core rate.


"The recent acceleration in the trend core inflation rate suggests that underlying pressures are getting a bit hotter at a time when the pace of economic growth looks to be cooling," said Dawn Desjardins, assistant chief economist for RBC Economics.


Desjardins said the central bank is likely to move toward higher interest rates in September, barring an unforeseen downturn in economic fortunes.


While gasoline prices were the biggest factor, the data show inflation is broad based in Canada. Year-to-year inflation was higher in May than April in seven of Statistics Canada's eight major categories.


Overall transportation costs, which include gasoline, were up 9.1 per cent in May. This also factored in a five per cent rise in vehicle-insurance premiums, plus higher prices for airline tickets and vehicles. The annual gain in this category was 8.3 per cent in April.


Food prices were up 3.9 per cent in May from a year earlier, compared to a 3.3 per cent rise in April. This included 5.4 per cent price hikes for meat, and 10.6 per cent more for dairy and bakery products.


Shelter costs were the only main category with lighter annual inflation of 1.8 per cent compared to 2.3 per cent in April.


On a seasonally adjusted basis, the month-to-month rate of inflation fell to 0.2 per cent in May from 0.3 per cent in April.


Derek Burleton, deputy chief economist with TD Economics, said annual inflation rates should ease this summer, noting declining gasoline prices in recent weeks and the fact that harmonized sales taxes introduced in Ontario and British Columbia last summer will no longer factor into inflation by July.

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Gasoline prices have been a driving force of inflation for several months.