Canada's annual inflation rate eases to 0.1% in May

Canada's annual inflation rate came in at 0.1 per cent in May, down from 0.4 per cent in April, owing to a year-over-year decline in energy prices, Statistics Canada said Thursday.

Gasoline prices fell25.1 per centfrom May2008to May2009following a 12-month decline of24.7 per centin April.

Food costsrose 6.4 per centin the 12 months to May, following a 7.1 per cent increase in April.

Statistics Canada said theone-year riseseen in May was the slowest rate of growth since October 2008.

The Bank of Canada's core rate of inflation advancedtwo per centover the12months to May, up from the1.8 per centrise posted in April.

One-month rise

While gas prices are lower compared to May 2008, Canadians paid more when May 2009 is compared to April 2009. On a month-to-month basis, gasoline prices rose8.3 per centfrom April to May.

The higher gas pump prices meant that, on a seasonally adjusted monthly basis, the overall consumer price index rose0.2 per cent from April to May, after falling0.2 per cent from March to April.

Some economists are skepticalabout the possibility of theoverall inflation rate turning negative, even with the economy in its weakened condition.

"With gasoline prices poised to post another increase of aroundeight per centin June, Canada may never actually dip into an outright negative reading on headline inflation, and core trends are well above [Bank of Canada] expectations," said BMO Capital Markets economist Douglas Porter.

"The main message is that unless the Canadian dollar suddenly reaches for the stars again, this above-expected inflation reading further reduces the odds of the Bank of Canada embarking on quantitative easing," Porter said in a commentary.

Krishen Rangasamy of CIBC World Markets saidCanada should see a few months where the year-over-year headline inflation rate"dips well into negative territory as we hit the one-year anniversary of the mid-2008 energy spike."

"But an outbreak of broader or sustained deflation is very unlikely, given what were seeing with core prices," Rangasamy said.