Canada Inflation Slows in May -- 2nd Update

By Paul Vieira Features Dow Jones Newswires

Inflation in Canada decelerated in May on lower costs for electricity, clothing and food, potentially cooling chatter in financial markets about an imminent interest-rate increase from the Bank of Canada.

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The all-items consumer-price index in May rose 1.3% from a year earlier, Statistics Canada said Friday, following a 1.6% advance in the previous month. May's increase was below market expectations for a 1.5% gain, according to economists at Royal Bank of Canada.

On a month-over-month basis, CPI in May edged upward 0.1%.

Meanwhile, the average rate of core inflation, based on three gauges used by the Bank of Canada, slowed for a third straight month, to hit 1.3% in May. The three measures of core inflation -- which aim to get a better read on underlying price pressures in the economy -- ranged from 1.2% to 1.5%.

The May CPI report will likely take "some of the steam out of the bank-is-going-to-hike-rates-soon freight train," said Doug Porter, chief economist at BMO Capital Markets.

The Bank of Canada sets rate policy to achieve and maintain 2% inflation.

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Expectations for a Bank of Canada rate increase this year strengthened markedly in the past two weeks, after the bank's top two officials struc k a more bullish tone on the economy, arguing growth was broadening on a regional and industry basis.

They signaled they were setting the groundwork to increase the policy rate, which sits at a near record low of 0.50%, adding that the two rate cuts it delivered in 2015 worked in helping the economy adjust to lower oil prices.

Strong employment data and robust advances in wholesale and retail sales have also fueled rate-increase expectations, with markets pricing in a nearly 50% probability of a rate rise at the Bank of Canada's next policy meeting on July 12.

The slowdown in May's CPI data has "helped recalibrate market expectations" for a rate increase, said Brittany Baumann, strategist at TD Securities. She said traders got excited Thursday after a stronger-than-expected retail-sales report for April, leading them to price in a greater than 50% probability of rate rise, according to trading in the overnight index-swap market.

Expectations cooled considerably after the release of the inflation report, Ms. Baumann said, adding the OIS market now suggests a 30% chance of a July rate increase in Canada.

In a speech this month, Bank of Canada Senior Deputy Gov. Carolyn Wilkins said below-target inflation was expected given the unused labor and industrial capacity, or slack, that built up in the economy.

She added that the central bank must also be aware of how economic conditions will evolve when setting rate policy to reach 2% inflation.

May's inflation report showed six of the eight components Statistics Canada tracks recorded increases in prices.

Putting a damper on price increases was a 5.5% year-over-year drop in electricity costs. Statistics Canada said this was largely attributable to a move by the government of Ontario -- Canada's most populous province -- to legislate lower power prices for households.

Total food prices fell 0.1% from a year ago, the eighth consecutive monthly decline. The drop in May was smaller than the previous month's 1.1% decline, and prices for fresh vegetables rose for the first time in nearly a year. The clothing and footwear index fell 1.5%.

Meanwhile, gasoline prices rose 6.8% from May of last year, although that was slower than the previous month's nearly 16% gain. The homeowners' replacement cost -- or the price to maintain a residence at its current market value -- rose 4.4%, the biggest gain since 2010.

On a seasonally adjusted basis, Canada's CPI fell 0.2% in May from the previous month.

Write to Paul Vieira at paul.vieira@wsj.com

(END) Dow Jones Newswires

June 23, 2017 10:33 ET (14:33 GMT)