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Motorists pump gas at a gasoline station in Toronto in this file photo. (Fred Lum/Fred Lum/The Globe and Mail)
Motorists pump gas at a gasoline station in Toronto in this file photo. (Fred Lum/Fred Lum/The Globe and Mail)

ECONOMY

Rise in gasoline price expected to spur inflation hike Add to ...

The temperature wasn’t the only thing on the rise last month. The price of gasoline, which tumbled in April, crept back up in May, likely pulling inflation with it.

Statistics Canada is widely expected to report a rise in the annual inflation rate last month of 0.9 to 1 per cent when it releases numbers on Friday.

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That would put inflation back into the low end of the Bank of Canada’s target range of between 1 per cent and 3 per cent.

This could mark the end of the downward pressure on inflation that characterized much of the past year, reaching a three-and-a-half-year low of 0.4 per cent, said Douglas Porter, chief economist at BMO Nesbitt Burns.

With a weaker Canadian dollar potentially easing some of the cross-border competition that has helped keep Canadian prices in check, Mr. Porter said he expects inflation to continue its upward trend in the coming months.

“Indeed, prices were very tame from May to July last year, suggesting that annual headline and core inflation will move higher into the summer,” he said.

Although he is predicting inflation will rise, Mr. Porter doesn’t anticipate it will spur any change by the Bank of Canada. The central bank’s benchmark interest rate stands at 1 per cent, with no increase projected by economists until late next year at the earliest.

“The anticipated firmer reading will bring inflation back to the Bank of Canada’s forecast for [the second quarter], though price pressures remain generally muted, leaving little need for the Bank to come off the sidelines,” Mr. Porter said.

Gasoline prices are expected to be the biggest driver of inflation, having rebounded after falling 6 per cent in April in the biggest year-over-year decline since October, 2009. But they weren’t the only category that saw a price jump last month.

“Recreation and health costs were likely tame, while other categories such as clothing and shelter got a boost – the latter from still-rising new house prices,” said CIBC World Markets.

In fact, the core rate of inflation, which excludes volatile categories like energy, is expected to rise as well, said Mr. Porter.

“May is a seasonally strong month for prices (though they fell last year) and this year is no different, with higher gasoline prices among the items driving the headline increase. Core prices are expected to perk up as well, accelerating to 1.3 per cent year over year.”

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