Canada's annual inflation rate unexpectedly rose to 2.9% in May while the main measure of core inflation rose for the first time in five months, indicating an unfavorable reading for the prospect of interest rate cuts in July.
Money markets cut their expectations for a rate cut in July to around 54% from 65% before this data was released.
The Canadian dollar pared early losses and strengthened by 0.8% to 1.3643 against the US dollar, or 73.30 US cents.
Analysts polled by Reuters had forecast inflation falling to 2.6% from 2.7% in April. Month-on-month, the consumer price index rose 0.6%, exceeding forecasts for a 0.3% increase.
The surprise increase in headline inflation was driven by prices of services including cellular services, package tours, rentals and air transportation, Statistics Canada said.
CPI-median and CPI-trim, the Bank of Canada's preferred measures of core inflation, rose for the first time since December, contrary to market expectations.
CPI-median increased to 2.8% from 2.6% in April while CPI-trim increased to 2.9% from 2.8%. Economists have even predicted CPI-median to remain at 2.6% and CPI-trim at 2.8%.
Following progress in bringing down inflation, the central bank had previously decided to lower its policy rate to 4.75% earlier this month and said the decision to ease further would depend on data developments.
Headline inflation is in line with the Bank of Canada's forecast of 2.9% by the end of the first half of 2024. The Bank will have another month of inflation data before its next rate announcement on July 24.
In May, retail price growth increased for the first time since June 2023, Statistics Canada reported, noting that grocery prices rose 22.5% compared to May 2020. Annual energy price inflation slowed to 4.1% from 4.5% in April.
Excluding volatile food and energy, prices rose 2.9% compared to a 2.7% rise in April.
Overall, services prices rose 4.6% in May, compared to a 4.2% increase in April, while goods inflation remained at 1%.
