Canada’s annual inflation rate rose unexpectedly to a seven-month high in May, data showed on Wednesday, prompting analysts to predict the Bank of Canada would not be cutting interest rates anytime soon.
Statistics Canada said the annual rate hit 2.4 per cent on increased prices for vegetables and durable goods. Analysts in a Reuters poll had expected the annual rate to edge up to 2.1 per cent from 2.0 per cent in April.
It was the first time since October 2018 that the annual rate had exceeded the Bank of Canada’s 2.0 per cent target.
Economic signals have been mixed in recent months. The Bank of Canada put interest rate hikes on hold in October amid a slowing domestic and global economy and is not expected to move again for the rest of the year.
“Certainly, it’s a reason for the central bank to hold off on cutting interest rates,” said Sal Guatieri, senior economist at BMO Capital Markets.
“As long as the economy picks up in (the) current quarter, as recent data suggest is happening, there’s really not a big reason for the Bank of Canada to follow the (U.S Federal Reserve) down the easing path,” he said in a phone interview.
The Canadian dollar strengthened to $1.3348 to the U.S. dollar, or 74.92 U.S. cents.
Statscan said Canadians paid 2.9 per cent more for meat and 16.7 per cent more for fresh vegetables than in May 2018 because of higher demand and tight supply caused by bad weather in growing regions.
Passenger vehicle purchases increased 4.2 per cent compared with the previous year because of manufacturing rebates for trucks, the agency said, the largest increase since October 2016.
Meanwhile, gasoline prices dropped 3.7 per cent in May from a year earlier. When they were excluded, the annual inflation rate rose to 2.7 per cent, the highest since November 2008.
Although two of the Bank of Canada’s three measures of core inflation edged above 2.0 per cent, CPI common - which the central bank says is the best gauge of the economy’s underperformance - remained at 1.8 per cent in May.
“The fact that the core inflation metric also moved higher is perhaps a bit more surprising,” said Andrew Kelvin, chief Canada strategist at TD Securities.
“I think that is the thing that markets should be focusing on because that fits with the narrative that the Bank of Canada has been talking about where the slowdown in economic activity in late 2018, early 2019 was a temporary phenomenon.”
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