At 2.5%, inflation in June rises to highest point since 2012

The country’s annual inflation rate rose to 2.5% in June as consumer prices grew at their fastest pace in more than six years, Statistics Canada said in a report Friday.

The federal agency’s latest inflation number received a boost from higher energy prices, especially gasoline, fuel oil and other fuels. It followed a 2.2% reading for May.

Other big contributors behind last month’s stronger inflation figure were pricier airline tickets, restaurants and mortgage interest costs. The downward pressure on prices last month was led by cheaper costs for telephone services, travel tours and digital equipment and devices.

The June pace lifted inflation to its highest point since February 2012 when it was 2.6%. It also moved the number farther away from the 2% mid-point of the Bank of Canada’s target range.

The central bank, however, has been expecting inflation to rise.

Last week, the central bank predicted inflation to move as high as 2.5%—due to temporary factors like higher gas prices—before it settles back down to 2% in the second half of 2019.

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The Bank of Canada can use interest rate hikes as a tool to help prevent inflation from climbing too high. Governor Stephen Poloz tries to keep inflation within a range of between 1% and 3%.

Poloz raised the trend-setting interest rate to 1.5% last week. It was the bank’s fourth hike over the last 12 months.

Read: Banks raise prime rates after BoC announcement

Friday’s Statistics Canada report said the average of Canada’s three measures of core inflation, which leave out more-volatile data like pump prices, rose slightly last month to 1.96%, from 1.9%. Underlying inflation is closely watched by the central bank.

While these readings “will boost expectations for a follow-up hike from the Bank of Canada in the near-term, the fact that the core-common measure of inflation remained at 1.9% suggests that central bankers still have the ability to be patient,” says Royce Mendes, director and senior economist at CIBC, in a Friday note.

“Indeed, they will likely want to see how much growth tails off after the second quarter rebound. The Canadian dollar is trading stronger, and fixed income has sold off,” he adds.

In a separate release, Statistics Canada said retail trade expanded by 2% in May thanks to higher sales at vehicle and auto parts dealers as well as gas stations. Sales growth was just 0.9% in May if these categories are excluded, the agency said.

The May increase follows an April contraction of 0.9%.

“Headline retail sales hit a home run in May,” Mendes says in the same CIBC release says. “In real terms, the 2% rise in retail sales will support healthy tracking forecasts for May GDP, already benefitting this week from the solid reading on manufacturing sales.”

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