Canada's annual core inflation rate cooled in May, possibly giving the Bank of Canada a little breathing room but unlikely, analysts said, to deter it from raising interest rates in the next few months. Statistics Canada said on Tuesday the rise in the core consumer price index.
Which excludes volatile items such as gasoline, was 2.2 percent in May, down from a market-worrying four-year high of 2.5 percent in April. The rate of increase would have been closer to 2.1 percent if not for the introduction of an updated basket of goods used to calculate the consumer price index. The Bank of Canada had been unpleasantly surprised by April's spike in inflation and signalled last month that it might have to raise rates "in the near term" to bring inflation down to the central bank's 2 percent target.
"Some people might be debating whether or not the Bank of Canada is going to be prepared to tone down its rhetoric or maybe not raise interest rates on July 10," said David Watt, senior currency strategist at RBC Capital Markets.
"I think the Bank of Canada doesn't want to take a pass because of this number and then have core inflation jump back up to 2.4 or even above that just a few days after their rate decision." Several other analysts also see a hike next month, but Douglas Porter at BMO Capital Markets Economics said rate increases beyond that were not a slam dunk.
"While today's result is no great surprise, it breaks a disturbing pattern of stronger-than-expected inflation readings," he said in a note to clients. "We continue to expect the Bank of Canada to hike interest rates at the next decision date on July 10, but they are likely to take future rate increases on a case-by-case basis after that point. Our best guess is that they will hike again in September."
Even with May's lower rate, core inflation has remained above 2 percent since July 2006. "The reality is the Bank of Canada is, I think, responding to bigger and badder trends in the economy with their shifting in disposition regarding rates and the need to perhaps raise rates in the near term," HSBC Canada market strategist Stewart Hall told Reuters.
The overall inflation rate was unchanged at 2.2 percent in May, but would have been 2.1 percent under the old basket which had been used through April. The basket was adjusted to give appropriate weight to new spending patterns and changing geographic realities.
Even as the annual core rate eased, month-on-month core inflation rose to 0.3 percent in May from an originally reported 0.2 percent in April. Under the new system, April's rise was 0.1 percent. Overall month-on-month inflation was 0.4 percent in May, mainly because of costlier gasoline. In April, Statistics Canada had originally reported a 0.4 percent rise, which, under the new basket, would have been a rise of 0.5 percent.