Inflation surpasses central bank sweet spot, rises in May

WATCH: On average the overall cost of living has been on the rise for several months now. And as Jas Johal reports, the entire energy sector is a major factor.

OTTAWA – Canada’s annual inflation rate unexpectedly jumped to 2.3 per cent last month, as the continuing gain in energy prices pushed the key economic indicator above the Bank of Canada’s two-per-cent target for the first time in more than two years.

The three-tenths increase in the headline inflation reading, including an identical gain in the underlying core inflation reading to 1.7 per cent, will surprise markets and possibly the central bank as well. The annual inflation rate was two per cent in April.

Economists had expected the headline number to remain at or a touch over two per cent, but a stronger than expected spike in energy costs took the consumer price index to a point where even the central bank may need to revise its thinking.

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Last week, bank governor Stephen Poloz came under fire from some analysts for maintaining that the recent run-up in the CPI from as low as 0.7 per cent in October was a temporary phenomenon primarily fuelled by energy costs and that the real danger still was a return to too low inflation.

Energy costs certainly remained frothy in May, rising by 8.4 per cent from last year as natural gas prices leaped by 21.3 per cent.

However, underlying core inflation – which excludes volatile items such as energy and some fresh foods – has also been on the march and the latest reading of 1.7 per cent is only three-tenths of a percentage point below target. On a month-to-month basis core rose 0.5 per cent, as did headline inflation.

Statistics Canada said the key contributors to the increase in core inflation were higher prices for meat, traveller accommodation and electricity. Consumers are paying 10 per cent more for beef than at the start of the year. Prices for fresh or frozen pork have risen by 12.2 per cent during the five-month period.

READ MORE: BoC still trying to figure out low inflation

Some economists have suspected governor Poloz continues to emphasize low inflation risks, which suggests he is a long way from moving to higher interest rates, in order to “talk down” the Canadian dollar and keep conditions accommodating for Canada’s export sales.

The emerging view among analysts is that while there is little danger of runaway inflation, the risk of disinflation has also largely gone given the continuing strength in oil prices and expectations of a growing economy in the U.S. and Canada.

Overall, Statistics Canada said prices increased for all major components from 12 months ago, with shelter costs rising by 3.4 per cent, transportation costs 2.7 per cent, and food by 2.3 per cent. Of the major components, alcohol and tobacco led the way with a 3.6 per cent increase.

Despite the overall gains, there were some bargains to be had in May. Dairy products, digital computing equipment, coffee and tea, cereal products and video equipment were all lower last month than they were a year ago.

Regionally, inflation was highest in Ontario at 2.8 per cent and lowest in British Columbia at 1.5 per cent.