By Ismail Shakil and Steve Scherer
OTTAWA (Reuters) -Canada's annual inflation rate came in at 3.4% in May, its slowest pace in two years, data showed on Tuesday, weakening the case for another interest rate hike next month.
Analysts polled by Reuters had expected annual inflation to drop to 3.4% from 4.4% in April. Month over month, the consumer price index was up 0.4%, Statistics Canada said, a tick lower than forecasts for an increase of 0.5%.
The annual rate, which benefited from comparison to last May's strong price increases, is the slowest since June 2021 and broadly in line with the Bank of Canada's expectation that inflation will cool to around 3% by mid-year.
The central bank hiked its overnight rate to a 22-year high of 4.75% earlier in June after a series of surprisingly strong data, including an unexpected uptick in April inflation, which showed that the economy was running hotter than anticipated.
After the last rate increase, the Bank of Canada said it would be gauging economic data to decide whether to keep raising borrowing costs.
The inflation reading "might give the Bank of Canada some reason to skip July," said Derek Holt, vice president of capital markets at Scotiabank. While Holt sees another hike coming this year, he characterized it as "fine tuning" and now more likely in September.
Money markets see a 56% probability of a hike of 25 basis points on July 12, down from 64% before the release of the inflation figures. They see nearly a 100% chance for a quarter-point move in September.
"With the labour market also loosening in May, the case for another rate hike in July is not quite as strong as it seemed a few weeks ago," said Stephen Brown, deputy chief North America economist at Capital Economics. But Brown still says a hike in July "is more likely than not."
Economic growth data for April, jobs figures for June, international trade for May and the Bank of Canada's business and consumer surveys are all due out before the next rate decision.
The average of two of the Bank of Canada's core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.9% compared with 4.3% in April.
Canadians have continued to renew and take new mortgages at higher interest rates, resulting in the mortgage interest cost index rising 29.9% on a year-over-year basis in May, the third consecutive month of record increases, Statscan said.
Grocery prices also continued to surge, rising 9% year over year in May, nearly unchanged from the increases recorded in April.
Canada's competition bureau also on Tuesday released a report urging governments to take action to inject more competition in the grocery sector in order to drive prices lower.
Energy prices slid 12.4% in May compared with the same month a year earlier, when supply uncertainty surrounding Russia's invasion of Ukraine led to a surge in energy prices, Statscan said.
An 18.3% drop in gasoline prices and the first year-over-year decline in natural gas prices since August 2020 contributed to the fall in energy price.
Excluding food and energy, prices rose 4.0% compared with a rise of 4.4% in April.
The Canadian dollar was trading nearly unchanged at 1.3154 to the greenback, or 76.02 U.S. cents, after touching a nine-month high at 1.3117.
(Reporting by Ismail Shakil and Steve Scherer; Additional reporting by Fergal Smith in Toronto and Dale Smith in Ottawa; Editing by Andrew Heavens, Christina Fincher and Mark Porter)