By Theophilos Argitis
Canadian inflation continued to ease in May, with a key gauge of price pressures at the lowest since 1999, a trend that will challenge the Bank of Canada’s recent efforts to set the stage for a rate increase.
The consumer price index rose 1.3 per cent in May from a year ago, down from an annual pace of 1.6 per cent in April, Statistics Canada reported Friday from Ottawa.
Exhibit A for why the Bank can takes it sweet time before raising rates
Douglas Porter, BMO chief economist
Measures of annual core inflation, a key indicator tracked by the Bank of Canada that excludes volatile components such as gasoline, fell to the lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 per cent, the lowest since March 1999.
The Bank of Canada last week began to play down sluggish inflation numbers, suggesting they were simply capturing the lagged effects of past excess capacity. But the numbers are below their forecasts. Inflation for the first two months of the second quarter is averaging 1.5 per cent, versus Bank of Canada forecasts of 1.7 per cent.
Economists surveyed by Bloomberg had forecast inflation would slow to 1.5 per cent from 1.6 per cent in April on lower gasoline prices.
Prices rose 0.1 per cent on a monthly basis, lagging the 0.2 per cent median economist forecast.
The Bank of Canada’s ‘common’ core rate was 1.3 per cent in May, the ‘median’ core rate was 1.5 per cent and the ‘trim’ measure was 1.2 per cent.
“ In a nutshell, no matter where you look, overall inflation is roughly 1.3% in Canada at this point (or even lower) — Exhibit A for why the Bank can takes it sweet time before raising rates. Canada’s inflation rate is now not only well below Britain and the US, but it is now also lower than that in China and the EU.” — Douglas Porter, BMO chief economist
Inflation is important to the central bank since its mandate is to target inflation at 2 per cent, an objective it has largely failed to deliver on over the past five years. When it talks about being less concerned about inflation, the Bank of Canada gives itself more leeway to talk about hiking interest rates, as it’s started do.
On a seasonally adjusted basis, consumer prices fell 0.2 per cent in May. Gasoline prices fell 4 per cent in May. Year-over-year, gasoline prices were up 6.8 per cent. That’s down from a 15.9 per cent increase in April.