Canada inflation rate rises 0.7 per cent in May

Canada’s inflationrate rose 0.7 per cent in May, driven largely by higher natural gas pricesas well as rising costs for beer, food and cigarettes. Despite the priceincreases for some of those sin consumables, core inflation stuck at 1.1per cent, below expectations. Economists say that's a worrisome sign forCanada's economic growth. 

StatisticsCanada said Friday that the year-over-year rise in inflation was due to a15.4-per-cent increase in natural gas prices, the largest jump since December2008. Food prices rose 1.3 per cent, following a 1.5-per-cent increase inApril, while tobacco sales rose 2.5 per cent as a result of higher prices forcigarettes in most provinces.

Consumers also paid 2.1 per cent more for alcoholbought from stores, "notably beer," StatsCan says.Transportation prices fell 0.5 per cent, due to a drop in auto andgasoline prices year-over-year in May. 

The items arepart of the Consumer Price Index (CPI), which is an indicator of price changesfor consumer goods in Canada. CPI is widely used to measure the rate ofinflation.

Economistshad expected an overall annual rate of 0.9 per cent in May, with core inflationat 1.2 per cent. The May numbers are seen as weak, and well below the Bankof Canada's target inflation rate of 2 per cent. Earlier this week, newBank of Canada governor Stephen Poloz referred to the central bank's policy ofinflation targeting as “sacrosanct.” 

"Clearlythe big story is just how very tame underlying price pressuresremain," says BMO chief economist Doug Porter. 

While theresults are in line with the central bank's expectations that core inflationwould average 1.2 per cent in the second quarter, "the surprises continueto run consistently to the low side of expectations on the inflation front inrecent months," Porter says. 

The Bankof Canada is closely watching inflation as it decided whether to raise – orsome economists believe possibly lower – interest rates, which haven’t budgedsince September 2010.

"Withthe official core inflation measure unchanged at a worryingly low 1.1 per centin May, the output gap would appear to be larger than the Bank of Canada iswilling to admit," says Capital Economics economist DavidMadani. "If, as we expect, economic growth fades this year, thenunderlying inflation will likely remain muted. Accordingly, we still think thatthe Bank will eventually drop its rate tightening bias."

The central bank recently lowered its 2013 growthforecast by half a point to 1.5 per cent. It has estimated 2014 economic growthwill be 2.8 per cent followed by 2.7 per cent growth in 2015.

In his firstspeech in the central bank role, Poloz called on businesses to start spendingto help spur economic growth.

"Thegood news is that the balance sheets of corporate Canada are healthy and thecapacity to invest exists," he said.