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OTTAWA (Reuters) - Canada's annual inflation rate fell to a 15-year low of 0.1 percent in May as cheaper gasoline and cars were partially offset by rising food costs, Statistics Canada said on Thursday.
But even though the year-on-year price gain was the lowest since November 1994, it was stronger than the drop of 0.2 percent expected by analysts. A 0.7 percent jump in prices in the month of May suggested price pressures that could be of concern to the Bank of Canada if they persist.
The core rate of inflation, which excludes volatile items and is used by the central bank to track underlying price trends, also quickened more than expected to 0.4 percent on the month and rose to 2 percent annually.
Market reaction to the inflation numbers was muted and economists played down any lurking threat from inflation for the Bank of Canada.
"It did come out stronger than expected across the board. But at the same time when we look at the inflation level at 2 percent they're right at the midpoint of the Bank of Canada's target range," said George Davis, chief technical strategist at RBC Capital Markets.
"From that perspective we're still not seeing a lot of concern or threats from the inflationary side of the equation," he said.
Charmaine Buskas, senior economics strategist at TD Securities, expects the Bank of Canada to shrug off the higher-than-expected numbers.
"This is unlikely to sway the Bank of Canada away from its stance that it will keep monetary policy on hold until the middle of next year," she said.
The bank has slashed its key interest rate to 0.25 percent and has pledged to keep it at that level until June 2010, as long as inflation appears to be on track to meet its 2 percent target in the medium term.
The bank's latest outlook includes an expectation that prices will fall in the second and third quarters of this year before climbing again toward its target.
"Eventually, I think that forecast will come to fruition. There is a lot of slack developing in the Canadian economy and outside of food and energy prices we will see some moderation in other prices as we go forward over the next couple of quarters," said Buskas.
In the 12 months to May, prices tumbled for gasoline, cars, fuel oils and natural gas while consumers paid more for food, Statscan said.
Statscan said the decline in energy prices was due more to high prices in 2008 than to recent market developments.
Indeed, in May compared to April, an 8 percent surge in gasoline prices was the main factor pressuring CPI along with car insurance premiums.
"As we saw in the U.S. yesterday, there was a little bit of a upturn in auto prices which is a surprise and food prices keep moving higher as well, which partly does feed into Canada's measure of core inflation," said Doug Porter, deputy chief economist at BMO Capital Markets.
Additional reporting by Toronto Treasury Desk, Editing by Chizu Nomiyama