July 18, 2014 / 12:43 PM / 3 years ago

Inflation in Canada rises to 28-month high in June

People walk out of a Canadian Tire Store that is located by a Mark's clothing store, which is owned by Canadian Tire Corporation in Toronto, May 8, 2014. REUTERS/Mark Blinch

OTTAWA/TORONTO (Reuters) - Canada’s annual inflation rate edged up to a 28-month high in June, the second month in a row it has exceeded the Bank of Canada’s target, posing a challenge to the central bank’s view that recent strength in prices is temporary.

Annual inflation rose to 2.4 percent last month, Statistics Canada said on Friday, the highest rate since the 2.6 percent seen in February 2012. It also surpassed forecasts for inflation to hold at May’s 2.3 percent level.

The Bank of Canada’s closely watched core inflation rate, which strips out the prices of some volatile items, increased to 1.8 percent from 1.7 percent the month before, making it the highest since June 2012.

The increase comes just two days after the Bank of Canada - which has long fretted about the risks of low inflation - said the recent surge is temporary and forecast that the overall inflation rate will drop below the bank’s 2.0 percent target next year.

The rise in inflation, combined with separate data that showed surprisingly strong wholesale sales in May, pushed the Canadian dollar to a one-week high. [CAD/]

The reports will further dampen any concern the Bank of Canada has about inflation being too low, said Doug Porter, chief economist at BMO Capital Markets in Toronto.

“In fact, if anything it casts a shadow of a doubt on just how transitory this runup in inflation actually is,” Porter said. “It doesn’t look that transitory to me, it seems, if anything, to be sticking.”

Still, analysts do not expect the report to alter the Bank of Canada’s view for now.

“Near-term price gain should ultimately be seen as transitory, just given that the broader growth outlook is somewhat softer than expected,” said Ian Pollick, fixed income strategist at RBC Capital Markets in Toronto. “Economic slack should, at some point, absorb some of this near-term strength.”

The central bank has kept its key interest rate frozen at a near record low 1.0 percent since September 2010 and says it will not consider a hike until inflation picks up and the sputtering economy recovers.

Rising prices for shelter, food and transportation were largely responsible for the increase in the annual inflation rate. Prices for shelter and food both rose by 2.9 percent from a year earlier.

A separate report from Statistics Canada showed wholesale sales jumped by an unexpectedly high 2.2 percent in May to a record C$52.58 billion ($49.14 billion). April’s month-on-month gain was revised up to 1.4 percent from an initial 1.2 percent.

The motor vehicles and parts subsector rose 9.8 percent in May, accounting for most of the overall gain. [ID:nL2N0PS22J]

($1=$1.07 Canadian)

Additional reporting by Andrea Hopkins and Solarina Ho in Toronto; Editing by Peter Galloway

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