May 21, 2008 / 11:21 AM / 9 years ago

Inflation speeds up in April on fuel hike

OTTAWA (Reuters) - Canada’s annual inflation rate skipped above expectations in April to 1.7 percent on double-digit gasoline price hikes, fueling market doubts over the timing of the central bank’s next interest rate cut.

The consumer price index jumped 0.8 percent in the month -- the biggest rise in 13 months -- for an annual rate of 1.7 percent, Statistics Canada said on Wednesday. This was the first acceleration in six months and above the 1.4 percent market consensus.

The core rate, which strips out gasoline and a number of other volatile items, also quickened more than anticipated. Core CPI rose 0.3 percent in April for a 1.5 percent annual rate compared with a median forecast of 1.3 percent.

Some economists think the numbers will force the Bank of Canada to pause in its rate-cutting cycle next month.

“Still not alarming but I think it puts any discussion of a move in June off the table and leaves open the prospect for further easing later if the economy warrants,” said Craig Wright, chief economist at Royal Bank of Canada.

“We’ve been surprised in Canada at how low inflation has been in a time where everyone else has been surprised to the upside, so maybe we’re looking like everyone else these days,” he said.

The Canadian dollar hit a new two-month high after the report, rising to US$1.0180, valuing a U.S. dollar at 98.23 Canadian cents, from pre-data levels around US$1.0138, valuing a U.S. dollar at 98.64 Canadian cents. Bonds stayed higher across the curve.

The Bank of Canada has been unfettered by inflation concerns, slashing its benchmark overnight rate by 150 basis points since last December to shield the economy from the U.S. slowdown.

It has signaled an additional cut without necessarily committing to take action at its next decision date on June 10.

PUMPED UP

Inflation momentum in April was largely to blame on prices at the gas pump, which leapt 11.6 percent in the year to April compared with 7.9 percent in March.

Excluding gasoline, inflation was 1.3 percent.

Passenger vehicle prices continued to fall, declining 6.6 percent in the year to April, but Statscan said there were fewer incentives by manufacturers than in previous months.

Stewart Hall, market strategist at HSBC Canada, said the gasoline factor was fully expected and should not deter the Canadian central bank from lowering borrowing rates at the first opportunity.

“The Bank of Canada still are inclined to cut rates and still have the ability given that the absolute levels are still well below their target of 2 percent,” he said.

The strong Canadian dollar against the U.S. currency has helped cheapen prices of imported goods and food and has led to consumer pressure on some retailers to drop prices to comparable U.S. levels.

But Statscan reported also upward pressure from mortgage interest costs, fuel oil, home replacement costs and bakery products.

(Editing by Renato Andrade)

Additional reporting by Frank Pingue in Toronto

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