Canada inflation slows sharply; lowest since 2010

Fri Jun 22, 2012 12:17pm EDT
 
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By Louise Egan

OTTAWA (Reuters) - Annual inflation in Canada slowed more sharply than expected in May, to 1.2 percent, due partly to cheaper fuel prices, giving the central bank another reason to refrain from raising interest rates any time soon.

The rise in the consumer price index (CPI) declined from 2 percent in April to its lowest level since June 2010, and was below the 1.5 percent median forecast of analysts in a Reuters poll. Gasoline prices tumbled on a year-on-year basis for the first time in almost two years, according to Statistics Canada data on Friday.

But the closely watched core inflation rate, a better measure of underlying price trends because it excludes eight volatile items, stayed closer to the Bank of Canada's 2 percent target, easing to 1.8 percent in May from 2.1 percent in the previous month.

Excluding energy only, the index rose 1.7 percent on the year, compared with 2.1 percent in April, Statscan said.

Canada's central bank is alone among the world's advanced economies in talking about interest rate hikes - Governor Mark Carney repeated that message on Thursday - but analysts say its case has weakened considerably.

"The bank's got much bigger items on their plate than inflation; I don't think inflation is crowding the top of anybody's worry list at this point," said Doug Porter, deputy chief economist at BMO Capital Markets.

"So I don't think it has a big effect on the bank, but at the very least it just sort of reinforces the message that there's not any rush for the bank to act on its tightening bias."

In a speech on Thursday, Carney stuck to the message he has been giving since April - that a rate hike may be in the works after the bank has held the benchmark lending rate at 1 percent since September 2010.   Continued...