The consumer price report showed that the headline inflation index rose 0.3% in May, beating expectations for an increase of 0.2%. The year-over-year rate eased to 1.4% from 1.8% in April because this year’s monthly increase fell short of last May’s 0.7% jump. The unadjusted Bank of Canada’s core measure also rose 0.3% in May, which was in line with expectations. The year-over-year rate edged down to 1.8% after averaging 1.9% in the first four months of 2010. In the month of May, prices for electricity, passenger vehicle insurance premiums, traveller accommodation and homeowners’ replacement costs rose. These increases were partially offset by lower prices for women and men’s clothing, gasoline and fresh vegetables. The seasonally adjusted all-items index posted a 0.1% decline in May. Relative to a year earlier, the biggest gains were recorded in passenger vehicles prices, gasoline, vehicle insurance premiums and homeowners’ replacement costs. Natural gas and other fuel prices were also higher than in May 2009. Moderating the effect of these increases were lower mortgage interest costs, furniture prices and women’s clothing prices. The 1.8% rise in the core index was mainly due to higher vehicle and vehicle insurance costs as well as homeowners’ replacement costs. The seasonally adjusted core measure rose 0.1% in May following April’s 0.2% rise. The three-month running rate in the core slowed to 1.2% annualized, from 2.2% in April, while the six-month annualized change stood at 2.0%. Canada‘s headline inflation rate has been volatile as gyrations in energy prices play out; however, the core rate has stayed in a fairly tight range between 1.5% and 2.1% for the past 17 months. Our work suggests that unlike the US, where the output gap is a more powerful force in driving core inflation, Canada’s core rate tends to gravitate around the Bank of Canada’s 2% target, which is in line with inflation expectations and has been borne out by the performance of the core rate during the economic downturn, which did not fall as much as was expected. The rapid recovery in GDP output combined with the rebound in employment suggests that the economy no longer requires the support from an ultra-easy policy stance. Still, the Bank will likely keep to its gradualist approach in removing this stimulus because events outside of Canada are creating uncertainty about the global economic outlook. As a result, we expect the Bank to move the policy rate higher in 25 basis point increments with the next move likely on July 20. Dawn Desjardins, Assistant Chief Economist, RBC Economics To view the economic data calendars with trend charts, go to:
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