Canada's Inflation Case Study

Canada's inflation rose at a moderate 1.5 percent annualized rate in May, down from 1.7 percent in April. That was short of economists forecast of 1.6 percent.

On a monthly basis, inflation increased by 0.4 percent, largely due to a 4.1 percent jump in gasoline prices in May, the Statistics Canada reported. But on yearly basis, gasoline prices plunged 7.1 percent in May after previously declining 5.8 percent in April.

“Inflation remains muted, but if energy prices hold onto their gains – let alone make further headway – we’ll be above 2 per cent toward the end of the year,” Canadian Imperial Bank of Commerce economist Nick Exarhos said in a note.

Core inflation rate, which excludes volatile items declined from 2.2 percent to 2.1 percent.
The Canadian dollar slightly loss part of its gains against the American dollar immediately the data was released, but gauges showed investors were more focused on Britain's upcoming referendum on whether to stay in the European Union.
According to economists, it is likely the central bank will focus more on the irregular economic growth expected over the second and third quarters, since the Bank of Canada has repeatedly said that temporary factors are influencing inflation.

Earlier this week, the Bank of Canada said the economy is likely to contract slightly in the second quarter, following recent wildfires in Alberta that disrupts oil production.

"The Bank of Canada's main focus in terms of the outlook for growth is monitoring the impact of the (oil) shutdowns and activity outside of the energy sector," said Paul Ferley, assistant chief economist at Royal Bank of Canada.

On a monthly basis, gasoline prices registered their third consecutive increase, rising 4.1 percent in May. This followed an 8.9 percent monthly gain in
April.