May inflation leap underlines BoC's fears

Thu Jun 19, 2008 10:02am EDT
 
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By David Ljunggren

OTTAWA (Reuters) - Consumer prices rose 2.2 percent in May, up from a 1.7 percent increase in April, on sharply higher gasoline prices, underlining a new Bank of Canada focus on the dangers of inflation.

The figures, released by Statistics Canada on Thursday, showed that consumer prices rose 1.0 percent in May from April, the single largest monthly rise since the 2.6 percent recorded in January 1991.

That 1991 figure was distorted by the introduction of a federal goods and services tax. The May numbers were pushed higher by an unexpectedly large jump in gasoline prices, up 15 percent from May 2007 and up 8.8 percent from April alone.

Analysts had, on average, expected a year-on-year inflation rate of 1.9 percent in May.

The Bank of Canada cited the risk of rising inflation when it unexpectedly kept interest rates on hold last week.

"May's (inflation) report dispelled any remaining doubts that interest rates might have hit the bottom in June," said Krishen Rangasamy of CIBC World Markets, predicting overall inflation would stay above 3 percent in 2009.

The central bank aims to keep inflation at the mid point of a 1 to 3 percent range, and it watches both the overall inflation rate and a core rate that excludes many volatile items.

"This just drives home the point why the Bank of Canada shifted its focus to inflation, and specifically to headline inflation," said Doug Porter, deputy chief economist at BMO Capital Markets.   Continued...