June 21, 2015 / 12:00 PM / in 2 years

Canada annual inflation still well below central bank's target

A woman carries shopping bags during the Christmas shopping season in Toronto, December 7, 2012.Mark Blinch

OTTAWA (Reuters) - Canada's annual inflation rate in May edged up to 0.9 percent from 0.8 percent in April but was still below the lower end of the Bank of Canada's 1 percent to 3 percent target range, Statistics Canada data indicated on Friday.

Analysts had forecast that the annual rate would stay at 0.8 percent. The Bank of Canada says a slump in crude oil prices will help depress the rate before it returns to 2.0 percent at some point in 2016.

The central bank surprisingly cut rates in January to provide what it called insurance against lower oil prices and says the move has worked so far. The next scheduled rate announcement is in July.

"We think the Bank of Canada are reasonably content to stay on hold for now, barring another growth setback," said Bipan Rai, director of foreign exchange strategy at CIBC World Markets.

The annual inflation rate increased on the back of food prices, which were 3.8 percent higher than in May 2014. The energy index fell 11.8 percent in the 12 months to May, following a 13.5 percent drop in April.

"May is a strong seasonal month for prices, so I wouldn't be too swayed by those big monthly moves," said Doug Porter, chief economist at BMO Capital markets.

Statscan said that excluding energy, the annual inflation rate would have been 2.2 percent.

The core inflation rate, which strips out volatile items and is closely watched by the Bank of Canada, dipped to 2.2 percent in May from 2.3 percent in April, the second month in a row it has dropped. Analysts had expected a core rate of 2.1 percent.

On a monthly basis, overall consumer prices rose by 0.6 percent while core prices advanced by 0.4 percent.

Markets were more focused on whether the economy would start growing again after contracting in the first quarter, said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

The retail sector did not provide much optimism, shrinking unexpectedly by 0.1 percent in April on lower spending at food and electronics stores, Statistics Canada said separately.

Market operators had forecast a 0.7 percent increase from March. Statscan revised March's month-on-month gain to 0.9 percent from the previous 0.7 percent increase.

Additional reporting by Solarina Ho and Andrea Hopkins in Toronto; editing by Paul Simao and Nick Zieminski

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