OTTAWA — Canada’s annual inflation rate jumped to the highest level in eight years last month, rising to 3.7 per cent as big increases in gasoline prices pushed the index to a new post-recession peak.
On a month-to-month basis, consumer prices rose by a significant 0.7 per cent in May from where they were in April, Statistics Canada reported Wednesday.
The magnitude of the increase was unexpected. Economists had predicted it would stay at 3.3 per cent for the third straight month.
The surprisingly strong increase in prices paid by consumers present the Bank of Canada with a dilemma less than three weeks before its governor and his deputies meet to set short-term interest rates for the country.
Market reaction following the Statistics Canada report suggested the chances of a rate hike — if not July 19, then possibly in early September — had increased somewhat.
The Canadian dollar rose more than a penny against the U.S. greenback Thursday and traded above $103 cents US for the first time in a week.
But analysts were not convinced Bank of Canada governor Mark Carney will be spooked enough to risk further depressing a weak economy by raising the cost of borrowing. For one thing, Carney had warned as far back as April he expected inflation to push above three per cent during the spring, although he likely hadn’t envisioned it reaching this high.
For another, most of the increase is attributed to one cause — petroleum-based energy prices.
Statistics Canada noted that gasoline prices were 29.5 per cent higher in May than they were a year earlier, the largest increase since September 2005 in the aftermath of hurricane Katrina. Gasoline in May hit just below the record high reached in July 2008 just prior to the economic meltdown.
Excluding gasoline, the annual inflation rate would be 2.4 per cent, still above the bank’s target rate but less threatening.
What will give the central bank some comfort is that core inflation — which excludes volatile items like energy and some kinds of food — rose only moderately to 1.8 per cent and remains below the desired two-per-cent target. As well, gasoline prices are known to have fallen somewhat in June, and the HST effect in Ontario and British Columbia — estimated at as much as 0.7 percentage points to the index — will be coming off in July.
TD Bank deputy chief economist Derek Burleton said indications are that inflation has hit the “high-water mark” and will soon start heading lower.
“All said, look for headline CPI inflation to fall back to below three per cent during the second half of 2011 and for core price inflation to stay below the Bank of Canada’s inflation target of two per cent,” he said.
Analysts still questioned whether Bank of Canada governor Mark Carney is prepared to take the policy interest rate north of one per cent given the risks the to global and Canadian economies.
“In normal times, today’s report and the recent trend would strongly argue for hikes coming as early as the next meeting but with the Bank of Canada’s wobbly attitude as of late, this prospect is highly uncertain,” said Jimmy Jean, an economic strategist for Desjardins Capital Markets.
But Jean said it would be a mistake to underestimate inflation, even if some of the reasons behind May’s scary number are temporary.
“This is the highest we’ve had since 2003, there’s no way a central bank wouldn’t be preoccupied by this,” he said. “It’s not just gasoline. A lot of the stuff that showed modest inflation in March and April actually accelerated in May.”
CIBC economists agreed that the fear of inflation could force Carney’s hand before the year is out.
May’s data showed price pressures building across the spectrum. Prices increased at a faster rate in May than the previous month in all major components except shelter. The increase was the highest since March 2003.
The cost of transportation rose strongly in May by 9.1 per cent, although largely due to the contribution of gasoline.
Another concern is that food prices continued to increase, 3.9 per cent overall, and 4.2 per cent on food purchased at stores. Individual items registered even bigger gains — meat cost 5.4 per cent more than a year ago, bread 10.6 per cent, and fresh milk rose 4.3 per cent.
Consumers also paid five per cent more for car insurance, clothing rose 1.1 per cent, and prices for recreation, education and reading went up by 2.4 per cent.
Shelter costs, however, were only 1.8 per cent higher in May, compared to the 2.3 per cent increase in April.
Regionally, the inflation rate rose in eight of the 10 provinces, with Nova Scotia recording the greatest annual increase at 4.6 per cent. All 10 provinces have inflation above three per cent.