Inflation rate holds steady at 2.2% in May despite soaring gasoline prices

The cost of living increased at a 2.2 per cent annual pace last month, matching the increase seen a month earlier, but well short of what economists had been expecting.

Loonie dips below 75 cents on signs rate hike is becoming less likely next month

Gasoline prices have increased by 22 per cent in the past year, but Canada's overall inflation rate is just one tenth of that. (Ken Ruinard/Associated Press)

The cost of living increased at a 2.2 per cent annual pace in May, matching the increase seen a month earlier.

Statistics Canada reported Friday that all eight components it tracks to come up with the consumer price index were higher during the month, but more than half of them grew by a slower rate than they did in April.

Energy prices have risen 11.6 per cent in the past year, and gasoline prices specifically have gone up by almost twice that.

When energy prices are stripped out of the equation, the cost of living has risen by 1.6 per cent in the past year, the data agency said. That's slower than the 1.9 per cent pace of gain seen a month earlier. Prices for things like telephone services, vegetables and travel accommodation have all declined in the past 12 months, which drags the overall inflation rate lower.

Rate hike now less likely

The inflation number came in lower than what economists had been expecting, which was for an annual rate of 2.6 per cent. That disappointment partly explains why the odds of a rate hike when the Bank of Canada meets next month declined after the inflation data came out.

Ordinarily, the central bank would raise its benchmark interest rate to cool down an overheated economy. But a slowing inflation rate suggests the bank won't need to do that.

Prior to the inflation numbers coming out, trading in investments known as overnight index swaps suggested investors thought there was about a 65 per cent chance that the bank would hike its rate next month. 

But after the inflation numbers came out, those odds dropped to 53 per cent.

The Canadian dollar, which had been inching higher before the numbers came out, lost almost half a cent on the news and was changing hands at 74.96 cents US on Friday morning. 

In a separate release on Friday, Statistics Canada also reported that retail sales declined by 1.2 per cent last month. Economists were expecting a flat showing, so that too is a sign that the economy may be cooling on its own without the need for any intervention from the central bank.

"Coming alongside a disappointing retail sales report, the data flow this week suggests little need for urgency from the Bank of Canada to raise interest rates," TD Bank economist James Marple said. "This is in line with our thinking. We expect just one more hike from the Bank of Canada this year before it pauses" to assess the state of the economy.