Weaker inflation slows to 1.3%, could weigh on central bank's rate decision

Federal Reserve Bank of New York President William Dudley at a Plattsburgh business forum on Monday

Federal Reserve Bank of New York President William Dudley at a Plattsburgh business forum on Monday

The data comes as the economy strengthens and the Bank of Canada prepares to make a scheduled interest rate announcement on July 12.

The cost of living rose by 1.3 per cent in the year up to May, a slightly slower pace than it increased by a month earlier.

"Further deceleration in core inflation is more likely to stay the bank's hand in July, while some stabilization or uptick, which can not be excluded at this stage, will put further pressure on the Bank of Canada to act", she said.

However, a continuation of above-trend economic growth should lower slack and help turn inflation higher in the second half of this year, permitting the central bank to hike the overnight rate in October, added TD Economics.

"Canada's inflation rate is now not only well below Britain and the US, but it is now also lower than that in China and the European Union", said Porter.

Vehicle and parts dealer sales fell 1.0 percent following a solid increase in March as consumers bought fewer new cars.

Consumer prices in B.C. rose at an annual rate of 1.9%.

Total food prices fell 0.1% from a year ago, the eighth consecutive monthly decline.

The 1.3% inflation rate is a six-month low for Canada, which saw the rate peak this year at 2.1% in January.

Gasoline prices fell 4.0% on the month and this was the main contributory to a 0.7% decline in transport costs for the month which held the annual rate at 2.2%.

Last month's 5.5 per cent decline in electricity was one of the biggest downward contributors and recent changes in Ontario's hydro rates appear to have had an impact on the national number.

The Statistics Canada report also found weaker price growth in every province last month, with the biggest slowdown in Manitoba. 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 almost a year.

"No matter where you look, overall inflation is roughly 1.3 per cent in Canada at this point", Porter wrote in a note to clients.

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