UPDATE 2-Canada May inflation jump underlines BoC's fears


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OTTAWA, June 19 (Reuters) - Canadian consumer prices rose 2.2 percent in May, up from a 1.7 percent rise in April, on sharply higher gasoline prices, underlining a new Bank of Canada focus on the dangers of inflation.

The figures, released by Statistics Canada on Thursday, showed that consumer prices rose 1.0 percent in May from April, the single largest monthly rise since the 2.6 percent recorded in January 1991.

That 1991 figure was distorted by the introduction of a federal goods and services tax, while the May numbers were pushed higher by an unexpectedly large jump in gasoline prices, up 15 percent from May 2007 and up 8.8 percent from April alone.

Analysts had, on average, expected a year-on-year inflation rate of 1.9 percent in May.

The Bank of Canada cited the risk of rising inflation when it unexpectedly kept interest rates on hold last week. The central bank aims to keep inflation at about 2 percent, and it watches both the overall inflation rate and a core rate that excludes many volatile items.

"This just drives home the point why the Bank of Canada shifted its focus to inflation, and specifically to headline inflation," said Doug Porter, deputy chief economist at BMO Capital Markets.

"I mean, it's all well and good that core inflation remains below target, but the fact of the matter is that we've got some very serious pressure on headline inflation, which the bank is obviously no longer looking beyond."

The Bank of Canada's core inflation rate, which excludes fuel, gasoline and some food items, was 1.5 percent in the year to May, and core prices rose 0.3 percent from April to May. Both increases matched analysts' expectations.

The Canadian dollar rose to C$1.0150 to the U.S. dollar, or 98.52 U.S. cents, from C$1.0179 to the U.S. dollar, or 98.24 U.S. cents, before the data.

Craig Wright, chief economist at the Royal Bank of Canada, said the increase in the inflation rate warranted caution rather than alarm.

"Right now, I think it suggests the Bank of Canada continues to talk a hawkish line on the inflation outlook, but unlikely to walk along that line any time soon," he said.

"At some point, unless they (central banks) get some relief from the impact of more moderate growth, or hopefully, more moderate commodity prices, they may well have to back the talk with the walk, but right now, steady rates as we move through the next little while," he added. (Reporting by David Ljunggren in Ottawa and John McCrank in Toronto)



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