Canada’s Consumer Price Index came in much stronger than expected for May, and it may be enough to stall rate cutting.

The headline CPI rose 0.5% in May, pushing the year-over-year inflation rate to 3.9% from 3.6%. Energy prices led the way, but food also helped juice the stats, now up 5.2% annually.

The result shocked some economists. BMO Nesbitt Burns says, “With gasoline prices easing, this may mark the near-term high for inflation. However, that high was a lot higher than most thought possible, and will keep the pressure on wages. Without glaring signs of economic weakness, the Bank may consider holding tight in July.”

CIBC World Markets agrees, noting, “Today’s CPI numbers (the last inflation news before the next Bank of Canada rate announcement) were off the charts, and proves an obvious obstacle to near-term bank easing. Indeed, with Dodge and company having already warned about the dangers of energy on consumer prices generally, this report is supportive of a cautious easing stance and could spark talk of a non-move come July 17.”

Others are less alarmed. TD Bank economists say the headline was alarming, but that it was largely in line with results last month. “This morning’s Canadian consumer price report may have made some hearts skip a beat, but there was much less cause for alarm in this morning-s report than appears at first glance — at least from the Bank of Canada’s standpoint.”

TD points out that seasonal factors, high energy prices, a poor growing season in the U.S. and tobacco tax hikes are all unusual items boosting the results. “In fact, the Bank of Canada’s new measure of core CPI recorded only a modest 0.2% advance during the month, which left it running at a non-threatening year-over-year pace of 2.3%. While the Bank of Canada will see through the flurry of one-shot and seasonal effects that has boosted the CPI over the past couple of months, it will remain on its toes for any evidence that the ongoing increases in energy costs are feeding through to other consumer prices.”

The folks at RBC DS Capital Markets Research see the 0.2% core rate rise as less benign, noting that it indicates, “a gradual increase in underlying price pressures”. It says, “The Bank of Canada will not like this report, having already reacted to April’s higher-than-expected CPI by expressing increased concern over inflation in its post rate-cut statement of May 29.”

DS says that the results are not indicative of a sustained trend, but it suspects the bank will play it safe with the stimulus. “The Bank of Canada will unlikely be this sanguine, however, and may pass up the July 17 easing opportunity to await more information,” it says.

CIBC World Markets says, “While a Fed rate decision and a number of demand-side indicators will be out before then, the Bank will want to see a marked easing in inflation before adopting a more aggressive rate-cutting stance.”