Canada inflation up near 40-year high; calls mount for 75-bps rate hike

Canadian consumer prices increased in May at rates not seen since January 1983, ahead of analyst forecasts, driven by pricey gasoline, official data showed on Wednesday, upping pressure on the central bank to follow the US Federal Reserve with a supersized rate hike.

Canada's annual inflation rate accelerated to 7.7% in May, galloping past April's 6.8% and analyst forecasts of 7.4%, data from Statistics Canada showed. Inflation is far above Bank of Canada's April forecast that it would average 5.8% this quarter.

"It's a bit alarming, particularly the breadth of inflation we're seeing, I think it really reinforces that Bank of Canada needs to take drastic actions to bring inflation under control," said Andrew Kelvin, chief Canada strategist at TD Securities.

The Bank of Canada raised interest rates to 1.5% from 1.0% this month, its second consecutive half percentage point increase, and said it was ready to act "more forcefully" if needed. It last hiked by more than 50-basis points in 1998, when it was defending the currency.

"We know inflation is keeping Canadians up at night. It's keeping us up at night," the Bank of Canada's Senior Deputy Governor Carolyn Rogers said in Toronto in reaction to the figures.

"We will not rest easy until we get (inflation) back down to target... That's why we're raising interest rates, and we're raising them quite aggressively," she added.

The Fed hiked US rates by 75-bps this month, a move economists said Canada was "extremely likely" to follow on July 13, considering May's data.

"The Bank will need to deliver at least 75 basis points to reassert to markets and Canadians that it has the fortitude to deliver sufficiently substantive monetary tightening to wrestle inflation down," said Jay Zhao-Murray, market analyst at Monex Canada.

Canadian prices rose more in May than in April in every province, led by higher pump prices and bolstered by higher services costs. Excluding gasoline, the annual rate rose 6.3% up from 5.8% in April, Statscan said.

"It is fairly clear that the pressures are spreading out and risking becoming much more entrenched," said Doug Porter, chief economist at BMO Capital Markets.

Energy prices rose 34.8% on an annual basis, while grocery price gains matched April's increase at 9.7% and shelter cost inflation also matched April at 7.4%. Prices for services rose more in May than in April, led by hotels and restaurants.

CPI common, which the central bank calls the best gauge of the economy's performance, hit 3.9%, beating forecasts of 3.5% and matching a July 1991 high. CPI median and trim, at 4.9% and 5.4% respectively, were the highest on record.

The Canadian dollar was trading 0.3% lower at 1.2956 to the greenback, or 77.18 US cents as oil prices tumbled.