July 21, 2008 / 8:05 PM / 9 years ago

Canada June inflation forecast highest since 2005

3 Min Read

<p>Canadian one dollar coins, also known as loonies, are displayed in Montreal, September 19, 2007.Christinne Muschi</p>

OTTAWA (Reuters) - High fuel costs likely propelled Canada's annual inflation rate in June to its highest level since September 2005, analysts said on Monday, lending weight to the central bank's warning of a brief bout of rampant price growth.

The consumer price index could climb 0.5 percent in June for a year-on-year rate of 2.9 percent, up from 2.2 percent in May, according to the median forecast in a Reuters poll.

That would put inflation well on track to breach the upper limit of the Bank of Canada's target range of 1 percent to 3 percent. Price growth could then continue to speed toward the 4.3 percent peak the bank expects early next year.

"Not only in Canada but globally, headline CPI is continuing to be driven by energy prices and especially gasoline prices, so that's going to be the big story," said Charmaine Buskas, senior economics strategist at TD Securities in Toronto.

"Through the summer months -- July, August and early September -- we could see a 3 percent inflation rate certainly," she said.

Core inflation, which excludes gasoline and other volatile items, will likely remain well contained, with a 0.1 percent gain in June and an annual rate of 1.6 percent compared with 1.5 percent in May.

Bank of Canada Governor Mark Carney tried to reassure Canadians last week that the core rate is the best predictor of future inflation and said the impact of higher oil prices will be short-lived.

The explanation came after Carney kept the bank's key interest rate unchanged at 3 percent for the second straight time last Tuesday, despite expectations the economy will grow this year at its slowest pace since 1992.

A rate cut to stimulate growth would provide "a double serving of red meat for the inflation monster," in the words of an editorial in the Montreal Gazette newspaper on Monday.

Even though energy costs and to a lesser extent food prices will hit Canadians' wallets, economist Karen Cordes of Scotia Capital believes inflation will be less of a problem for Carney than the weak economic performance.

The core rate is already being pulled down by items other than commodities, she said.

"You can see it already in what's going on in Canada," she said. For example, in the housing market we're already seeing the slowdown has begun and that is going to have an impact on core CPI and will obviously offset some of the pressure from energy if you're looking at the headline rate," she said.

Editing by Rob Wilson

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