UPDATE 1-Canada inflation picks up in May but still tame at 0.7 pct

Fri Jun 21, 2013 8:37am EDT
 
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* Canada May CPI rises to 0.7 pct year-on-year from 0.4 pct

* Core CPI rises to 1.1 pct, unchanged from April

* Natural gas prices main reason for inflation pickup

OTTAWA, June 21 (Reuters) - A jump in natural gas prices drove up Canada's annual inflation to 0.7 percent in May from a 3-1/2-year low of 0.4 percent, but the rate remained well below the central bank target, confirming there is little pressure to raise interest rates soon.

The consumer price index (CPI) climbed 0.2 percent in the month, Statistics Canada said on Friday. Core CPI, which excludes energy and other volatile items, also gained 0.2 percent, leaving the annual rate unchanged at 1.1 percent.

Both the overall and core inflation rates were below market forecasts of 0.9 percent and 1.2 percent, respectively. Only one out of 23 analysts in a Reuters poll had expected total CPI as low as 0.7 percent.

A 15.4 percent spike in natural gas prices in the year to May -- the biggest rise since December 2008 -- was the main reason inflation rose in May, Statscan said. Cheaper gasoline tempered the increase.

The Bank of Canada, which has signaled its next move on rates will be a hike rather than a cut, predicted in April that overall and core inflation would remain subdued in the near term, averaging 1 percent and 1.2 percent, respectively, in the second quarter. It said both measures would gradually rise to 2 percent by mid-2015.