June 15, 2012 / 8:13 PM / 5 years ago

Sharp slowdown in Canada inflation seen in May

OTTAWA (Reuters) - Canadian data is expected to show consumer price inflation slowed to an annual rate to 1.5 percent in May, from 2.0 percent in April, taking pressure off the Bank of Canada and allowing it to focus on the potential impact of the European debt crisis.

The core inflation rate, which excludes gasoline and other volatile items, is seen easing more gradually to 1.9 percent from 2.1 percent, according to the median forecast of analysts polled by Reuters.

Analysts expect to see the consumer price index rise by only 0.1 percent, month to month, after a hefty 0.4 percent gain in each of the previous three months. In April, a 3.2 percent jump in gasoline prices contributed to the rise.

Much of the May slowdown will reflect moderation in prices at the gas pump, analysts said.

“We expect this string of consecutive monthly gains to be broken in May,” said Paul Ferley, assistant chief economist at RBC, in a note to clients. RBC sees prices remaining unchanged in the month.

On an annual basis, energy prices are expected to drop 1.1 percent in May compared with a similar gain in April, Ferley said.

“This would mark the first annual decline in energy prices since October 2009,” he said.

In a statement accompanying its June 5 decision to hold interest rates steady at 1 percent, the Bank of Canada said inflation would come in a little weaker than it had anticipated in its April forecasts because of cheaper gasoline.

It now sees overall inflation slowing to less than 2 percent in the short term, while core inflation will remain around 2 percent.

Even so, and even as the European debt crisis escalates again, the central bank repeated its message that interest rate increases would eventually be needed in Canada, softening its previous hawkish tone only slightly. <ID: nL1E8H55X2>

If the forecasts for May inflation are accurate, the bank could backpedal further next month and soften its tone again or withdraw its rate-increase language altogether.

Traders are pricing in more than a 50 percent chance of a rate cut by December of this year, according to the yields on overnight index swaps, which trade based on expectations for the policy rate. They see a 15.9 percent chance of a cut in July.

By contrast, economists in a May 30 Reuters poll still expected the next move to be a rate increase. The median prediction was for a 25 basis-point hike in the first quarter of 2013.

Reporting By Louise Egan; Editing by Frank McGurty

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