By Dow Jones Business News,
June 20, 2014, 10:41:00 AM EDT
By Paul Vieira
OTTAWA--Canada's annual rate of inflation rose in May at its fastest pace in over two years and exceeded the Bank
of Canada's closely watched 2% target, powered by increases in energy and meat costs.
The May report from Statistics Canada on Friday is likely to increase pressure on the Bank of Canada to alter its
inflation outlook that currently emphasizes the risks of low inflation, although Governor Stephen Poloz might choose to
look past these latest results and focus on the risks posed by uncertainty in China and Europe.
Canada's all-items consumer-price index in May rose 2.3% on the year. That rate compares with market expectations
of a 2% rise, according to economists from Royal Bank of Canada. In April, annual inflation sped to 2%.
The annual core rate of inflation, which excludes volatile components such as some food and energy prices, was 1.7%
in May, also ahead of market expectations, which were for a 1.5% gain in prices. Core inflation rose at its fastest pace
in nearly two years. The rate the previous month was 1.4%.
Month to month, both headline and core prices rose 0.5%.
Prices in May rose at the fastest pace since February 2012, and the back-to-back annual inflation gains of 2% or
more emerge after inflation remained below that level for nearly two years.
The Bank of Canada sets its policy lending-rate at a level to achieve and maintain 2% inflation. But a second
straight month of frothy price gains are unlikely to persuade Mr. Poloz to change course and maintain a neutral stance
on interest rates.
Earlier, this month, Mr. Poloz said a weak U.S. economy and uncertain conditions in China and Europe are reasons to
flag downside risks to inflation.
The Bank of Canada "will feel no urgency to respond to the upswing--after a long spell below 2%, policy makers will
readily tolerate a spell above 2% for headline inflation," said Douglas Porter, chief economist at BMO Capital Markets,
in a note following the release of the May CPI report.
"However, clearly the tone of the Bank of Canada's rhetoric will change, and change significantly," Mr. Porter
added, perhaps as early as next month when the central bank releases its quarterly economic update.
Economists say the core rate, because of the exclusions, provides policy makers with a better picture of the pace
of price increases and the forward-looking trend. However, core this month rose at a faster-than-expected rate.
The Canadian dollar strengthened following the release of the inflation report. The U.S. dollar was at C$1.0766
early Friday, down from C$1.0817 late Thursday.
Risks of slower inflation remain a concern for central bankers in the developed world, with policy makers in
Europe, for instance, implementing new, unconventional measures to combat the risk of deflation.
Federal Reserve Chairwoman Janet Yellen said inflation in the U.S. has been on the high side but added data were "
noisy." She added the Fed might tolerate inflation overshooting its 2% goal if the U.S. economy were still far from the
Fed's goal of maximum employment.
The Canadian data agency said on Friday that annual prices rose in all components tracked. The year-over-year rise
in inflation was paced by energy prices, which as a group rose 8.4%, matching the previous month's gain. Gasoline prices
rose 6.3%, while natural gas costs surged 21.3%. Electricity prices also rose 7%. Excluding energy, CPI rose 1.7%.
Food prices rose 2.3% in May, led by a 8% increase in the cost of meat. Meanwhile, shelter costs climbed 3.4%, and
transportation costs increased 2.7%. On a seasonally-adjusted basis, CPI rose 0.2% in May, following a 0.3% rise in the
Write to Paul Vieira at email@example.com
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