Canada's annual inflation rate surges to a 29-month high of 3.2% in May

Canada's annual inflation rate surged to a 29-month high of 3.2% in May, exceeding expectations and moving outside the Bank of Canada's 1-3% target range.

Canada's annual inflation rate in May accelerated more than expected to 3.2%, a 29-month high, data showed on Monday, as the impact of higher crude oil prices due to the Iran conflict continued to filter through ‌gasoline costs. Analysts polled by Reuters had estimated the annual inflation rate to touch 3% in May, up from 2.8% in April.

Gasoline prices, however, are already showing a major reversal in June after an interim peace deal was signed between the United States and Iran last week, which, analysts have said, could help ease the headline number in June. This is the first time in nearly two and ‌a half years that Canada's headline inflation has moved outside the Bank of Canada's 1%-3% target range, at a time when rising living costs are emerging as a political challenge for ‌Prime Minister Mark Carney, who pledged to tackle affordability after his party won a parliamentary majority in April. "It's never good news to see the overall inflation rate track above 3%, even if it is for one month only," said Doug Porter, chief economist at BMO Capital Markets.

He called the May inflation number a "mild disappointment overall." Statistics Canada said excluding the impact of gasoline prices, the consumer price index still posted a higher increase of 2.2% in May from 2% in ⁠April led by ​elevated cost of food, recreation and alcoholic beverages.

The ⁠monthly inflation rate rose to 1% in May, exceeding expectations of a 0.8% rise. This is the highest monthly rise in 15 months. Gasoline prices in May rose by 33.2% on a year-over-year basis. Consumers in May shelled out more ⁠for gasoline than during its previous peak four years ago when Russia invaded Ukraine, StatsCan said.

This led to an increase in the cost of transportation, which accounts for almost 18.5% of the CPI basket, posting a ​9% annual increase last month. The inflation number is not likely to alter the Bank of Canada's assessment of underlying inflation as it said earlier this month that it was seeing ⁠limited evidence higher energy prices were fueling broad-based inflation.

The cost of food, which also contributes around 17% of the CPI basket, rose 3.8% in May from 3.5% in April, StatsCan said, adding that this was fueled by an increase in ⁠prices ​of fresh fruits and vegetables which rose by 5.3% and 9% respectively in May. The impact of higher transportation and food prices was largely offset by shelter costs, the biggest contributor to the CPI basket at close to 30%. Shelter costs rose by 1.7% in May following a 1.8% increase in April, data showed, led by a reduction in mortgage costs which shrank by 0.2% ⁠last month.

The closely tracked measure of core inflation stayed unchanged in May. CPI-median, the centermost component of the CPI basket, stood at 2.1%, while CPI-trim, which excludes the most extreme price changes, ⁠was at 2%.

"The reality is that core remains ⁠essentially right on target, and the recent big pullback in oil prices—if sustained—will deliver some important relief on headline readings in coming months," Porter added. The Canadian dollar firmed after the data with the loonie trading up 0.01% to C$1.4150 against the U.S. dollar, or 70.67 U.S. cents. Money markets, ‌which were not expecting a ‌rate hike this year, priced in one 25 basis point hike in December after the inflation data. (Reporting ​by Promit Mukherjee; Editing by Dale Smith)