May 21, 2008 / 2:48 PM / 9 years ago

Canada inflation edges up, doubts cast on rate move

OTTAWA (Reuters) - Canada’s annual inflation rate skipped above expectations to 1.7 percent in April, because of double-digit gasoline price hikes, casting doubt on the timing of the Bank of Canada’s next interest rate cut.

The jump in the April consumer price index, reported by Statistics Canada on Wednesday, was the first upturn in five months and topped the 1.4 percent forecast by market analysts. Month-on-month, the rate was up 0.8 percent from March.

The surprisingly high number pushed the Canadian dollar to a two-month high and prompted Prime Minister Stephen Harper to downplay the price pressures.

Statistics Canada also reported on Wednesday that the composite leading indicator inched up 0.1 percent in April, suggesting a slight pickup in economic activity after two sluggish months.

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

Some economists said 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.

Others think the bank should still reduce interest 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,” said Stewart Hall, market strategist at HSBC Canada.

The Canadian dollar CAD= rose after the report to $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 central bank has been unfettered by inflation concerns, slashing its benchmark overnight rate by 150 basis points since last December. It has signaled more is to come but did not commit to taking action at its next decision date on June 10.

A majority of primary securities dealers surveyed by Reuters predicted on Wednesday the bank would make a quarter-point cut on June 10, although two dealers who had previously forecast a lowering at that time were now undecided. Most forecast no change at the July announcement.

FOOD PRICE TIDE

Some economists said the strong Canadian dollar was having less effect in offsetting higher prices for food imports than in previous months.

“The combination of grocery store wars and the dampening legacy of the lofty loonie were not sufficient to fully offset the rising global food price tide,” said Michael Gregory, economist at BMO Capital Markets.

Also, if the effect of a cut to the federal sales tax is ignored, inflation would be above the Bank of Canada’s target of 2 percent.

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

Excluding gasoline, inflation was 1.3 percent.

Prime Minister Harper, speaking to reporters later in the day, said the spike in inflation was limited to some products and to Western Canada, the heart of Canada’s booming energy sector.

“Notwithstanding the increase in the gas price, a little bit in food prices, a little bit of a tick up last month, inflation is still by historical standards very, very low in this country,” he said.

The quickening inflation coincided with a leading indicator that showed signs of still-strong domestic demand and a thriving equities market.

After sliding for five months, prices on the Toronto Stock Exchange began their upward climb in April toward record highs in May. The stock price index rose 0.4 percent.

Retail sales of durable goods jumped 1.3 percent, a sign of strong household demand that offset a seventh straight decline in housing.

New orders for manufacturers marked their first back-to-back gain since June 2007, rising 0.4 percent thanks to demand for airplanes.

Additional reporting by Frank Pingue in Toronto; Editing by Rob Wilson

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