May inflation rate dips to 1.4 per cent

OTTAWA, Ont. – Canada’s annual inflation rate fell sharply last month to 1.4 per cent, as year-to-year increases in gasoline prices began to moderate.

There were few surprises in Statistics Canada’s inflation report on Tuesday, and more importantly, few aspects that would worry the Bank of Canada as it prepares for a key decision on interest rates next month.

The central bank’s much-watched core index — which excludes the volatile energy sector — declined by one notch to 1.8 per cent, well below the bank’s desired target of 2.0 per cent.

On June 1, the bank hiked the trendsetting policy rate for the first time in two years and, with the European debt crisis adding uncertainty, analysts are divided whether the Bank of Canada will continue tightening at the next meeting of governors on July 20.

The May inflation numbers will give the bank governors little concern that prices are getting out of hand.

Excluding energy, the national inflation rate stood at a tepid one per cent in May.

On a month-to-month basis, Canadians paid 0.3 per cent more for goods last month than they did in April.

Gasoline prices have been skewing the inflation rate in Canada for the past two years in response to the historical acceleration in oil prices in the spring and summer of 2008, which was followed by an equally steep drop.

But in May, pump prices began exerting less of an influence in the rate as prices began falling roughly in line with where they stood last year.

The agency said pump prices were still 6.2 per cent higher than they were 12 months ago, but that is a huge drop from the 16.3 per cent difference that existed in April. On a monthly basis, gasoline was actually 0.5 per cent lower in May than in April.

Overall, six of the major components tracked by the agency recorded price increases, most moderate.

Transportation prices rose 4.1 per cent, largely due to gasoline, while shelter costs rose 1.3 per cent as a 4.4 per cent rise in the price of homes was offset by a 5.4 per cent decline in mortgage interest costs.

Food prices, a key element of the index, went up a tame 0.8 per cent, the smallest increase since March 2008.

Meanwhile, prices for clothing and footwear declined 1.3 per cent on an annual basis, and recreation, education and reading slipped by 0.2 per cent.

The agency said all provinces experienced positive inflation last month, but at a slower pace than the previous month. Inflation was highest in Ontario at 1.9 per cent, and lowest in Manitoba at 0.5 per cent.