Inflation rate at 0.7 per cent in May, below expectations

OTTAWA – The annual inflation rate rose slightly last month, but remained tame at 0.7 per cent, which was below analysts’ already modest expectations.

Statistics Canada reported Friday that May’s higher natural gas prices — which had the biggest 12-month increase in more than four years — contributed to inflation, but that was partly offset by another drop in gasoline prices.

“Overall, today’s inflation report showed that consumer prices continue to face little upward pressure,” TD economist Diana Petramala wrote in a commentary.

“Food and shelter costs contributed the most to Canadian inflation in May (they are the category consumers spend the most on), but were still only up 1.3 per cent from year ago levels.”

Petramala noted that higher natural gas prices, which were up 15.4 per cent in May compared with a year earlier, added to the cost of shelter. Rent and property taxes also rose, but mortgage interest costs fell 4.1 per cent.

Statistics Canada said May saw the largest year-over-year increase for natural gas prices since December 2008. Alberta had the biggest jump, but the increases were seen across the country, the agency said.

Food prices rose 1.3 per cent year-over-year in May, after increasing 1.5 per cent in April.

“Compared with May 2012, consumers paid more for food purchased from stores, notably fresh vegetables (up 5.8 per cent) and bakery products (up 3.9 per cent),” Statistics Canada reported. “Prices for fresh fruit and meat also rose in the 12 months to May, although at a slower rate than in April.”

The cost of alcoholic beverages and tobacco products advanced 2.5 per cent in May, led by higher prices for cigarettes in most provinces.

Offsetting these increases, transportation prices fell 0.5 per cent from May 2012 — a smaller drop than the year-to-year decline of 2.1 per cent in April. The transportation index was largely affected by lower gasoline prices.

The Bank of Canada’s core index rose 1.1 per cent in the 12 months to May. That matched the increase in April and was also lower than expected. The core index excludes certain highly variable prices, including fruit, vegetables, mortgage interest, natural gas, fuel oil and gasoline.

The central bank aims for core inflation to be about 2.0 per cent over the long term, with a target range of between 1.0 and 3.0 per cent annual inflation.

Economists had predicted an overall annual rate of 0.9 per cent, with core inflation at 1.2 per cent.

TD Economics said Friday it doesn’t expect the inflation rate to hit 2.0 per cent until 2015. It also said the Bank of Canada will likely keep its key lending rates unchanged until the end of next year.

Slower consumer spending, weaker global growth and increased competition among retailers has put a lid on Canadian price increases, Petramala wrote in the TD commentary.

“Note that while inflation has been unusually weak in recent months (6 month moving average is 1.2 per cent year-over-year), the Bank of Canada’s core measure of inflation has remained under its 2.0 per cent target since 2007,” she said.

“Looking forward, a weaker Canadian dollar and improving economic momentum will likely lead to a slight pick-up in inflation in the months ahead. Still, a moderate growth environment, in combination with cooling home prices and a constrained consumer will likely continue to keep a lid on inflation.”

Meanwhile, Statistics Canada said retail sales edged up 0.1 per cent to $39.5 billion in April, which was weaker than an expected 0.2 per cent, following flat sales in March.

The federal agency said stronger sales at motor vehicle and parts dealers were offset by weaker sales at gasoline stations.