Canada's annual rate of inflation shot up to 2.5 per cent in May, fuelled by the biggest monthly increase in gasoline prices in more than two decades, Statistics Canada said Tuesday.
Economists had predicted a jump in the 12-month consumer price index last month on the back of higher gas prices, but most foresaw a more moderate 2.1 per cent.
In April, the annual rate of inflation was 1.6 per cent.
The May increase was largely the result of higher gasoline prices, which shot up 30.3 per cent in May, compared with the same month a year earlier.
"Gasoline prices were by far the largest factor contributing to the 12-month increase," Statscan said.
From April to May alone, gasoline prices were up more than 13 per cent, the biggest increase in more than 20 years.
However, the closely watch core rate of inflation fell back to 1.5 per cent in May, from April's 1.8 per cent, suggesting few underlying price pressures in the economy. The core rate is the Bank of Canada's preferred measure of inflation. It excludes the eight most volatile components of the consumer price index.
In recent remarks Bank of Canada Governor David Dodge and other central bank officials had cautioned that surging world oil prices might result in a surprising jump in overall inflation levels in coming months, although they also noted that the core rate is likely to remain below the mid point of the bank's 1-to-3 per cent target until the end of next year.
"The Bank of Canada has been sending out warning flares for weeks that headline inflation was coming in higher than they earlier expected, due to surging energy costs," BMO Nesbitt Burns senior economist Douglas Porter said.
"However, the issue for policy makers is whether that translates into a broader outbreak of inflation — and there is little sign of that here."
He noted, however, that core inflation still remains slightly above what the bank was calling for in the second quarter — the bank's April monetary policy report suggested a core rate of 1.4 per cent for the quarter — "so this latest mild reading on core by no means rules out rate hikes later this year."
Most economists are expecting the central bank to start raising its key target for the overnight rate from its current decades-low of 2 per cent later this year. Many have suggested an increase in the bank's Sept. 8 fixed-date policy announcement is likely.
According to Tuesday's report, the consumer price index — which offers the broadest measure of inflation — rose a moderate 1.3 per cent in May when energy prices were taken out of the equation, just slightly ahead of the 1.2-per-cent advance recorded in April.
On a monthly basis, the CPI surged a surprising 0.9 per cent, compared with the 0.5-per-cent increase forecast by analysts. That increase— the biggest since May, 2001 — was also fuelled largely by higher gasoline prices, Statscan said. Excluding energy prices, the monthly index was up 0.3 per cent.
On average, gasoline prices were 13.6 per cent higher in May than they were in April.
"This is the highest monthly rise since June, 1983, (when prices rose 19.1 per cent)," Statscan said.
"Increases were seen in all provinces, ranging from 3.6 per cent in Prince Edward Island, where prices are regulated, to 17.5 per cent in Manitoba."
Increased costs for traveller accommodation, air transportation and fresh fruit also put upward pressure on the index, although to a lesser extent than gasoline prices, the government agency noted.
Consumers paid less for women's clothing as well as seeds, plants and cut flowers in May compared with the month before.
In terms of the annual rate, higher prices for cigarettes, tuition and homeowners' insurance all contributed to the 12-month increase in the CPI. The cost of structural replacements for homeowners was also up.
Downward pressure on the 12-month index came from lower costs for computer equipment, automobiles and fresh vegetables.
