Canada Inflation Rises


Canada's annual inflation accelerated for the second straight month in May as gasoline prices surged, lending support to the Bank of Canada's assertion last week that prices may keep rising all year.

Consumer prices rose 2.2 percent from a year earlier, the fastest pace since January, Statistics Canada said today. Economists surveyed by Bloomberg said inflation would accelerate 1.9 percent, the median of 22 estimates. Consumer prices rose 1 percent from April, the most since January 1991, exceeding analysts' 0.6 percent forecast.

Today's report may strengthen the case for the central bank to keep borrowing costs unchanged as prices climb and economic growth slows. The Bank of Canada this month unexpectedly left its benchmark interest rate at 3 percent after four straight cuts, saying energy costs threaten to push inflation above the upper limit of its target range for the first time since 2005.

The bank sets interest rates to keep inflation between 1 percent and 3 percent, with an optimal target of 2 percent. Economists surveyed by Bloomberg say policy makers will leave rates unchanged until at least December because inflation concerns supersede the need to stimulate the slowing economy.

Concerns about rising prices are prompting bond investors to pay a bigger premium to hold debt that's protected against inflation. The gap between yields on regular government bonds due in 20 years and inflation-protected bonds widened to 2.64 percentage points yesterday, the most since August 2006, from 2.09 percent in December.

Gasoline prices accounted for all of May's acceleration, soaring 15 percent from a year ago. Excluding gasoline, consumer price inflation would have slowed to 1.5 percent after 1.7 percent in April, the statistics agency said.

Still, mortgage interest costs gained 8.9 percent on rising home prices, and bakery products jumped 13.2 percent, the fastest since October 1981.

Month-over-month inflation accelerated in May in part because of a 2.9 percent gain in transportation costs and a 1 percent gain in food prices, Statistics Canada said.

The core inflation rate was unchanged from a year earlier at 1.5 percent and the monthly core inflation rate stayed at 0.3 percent, in both cases matching economists' median forecast.

The core rate, used by policy makers as a guide to future trends, excludes volatile items such as gasoline and fresh fruit and discounts tax changes such as a reduction in the federal sales tax earlier this year. An 8.1 percent drop in car prices kept the core index from rising in May, Statistics Canada said.

Bank of Canada policy makers had said in April that inflation would stay below their target until 2010, as a strong Canadian dollar makes foreign-made automobiles cheaper and grocery stores compete to keep food prices down.

The currency's surge to parity with the U.S. dollar last year prompted consumers to demand lower prices for imports such as cars and books, and acted as a shield against more expensive commodities priced in U.S. dollars. The currency hit a record 90.58 Canadian cents per U.S. dollar on Nov. 7.

 


TradingEconomics.com, Bloomberg
6/19/2008 6:45:50 AM