Canada’s annual inflation advanced 2.8% in May, a substantial gain from the 2.4% change of April, as the price of gasoline rose.

Statistics Canada said today core rate of inflation, excluding the eight volatile components identified by the Bank of Canada for monetary policy, recorded its strongest 12-month increase since December 2003, jumping from 1.6% in April to 2% in May this year.

Economists had been expecting the annual inflation rate for May to come in at 2.7%.

Many economists had forecast that the Bank of Canada would take a pause after it made its last interest-rate hike on May 24. However, the latest inflation reading, combined with booming job creation figures from May, could lead the bank to bump up rates again.

“This report is a rare surprise to the high side for Canadian inflation, and follows the surprisingly robust May jobs report and the solid [first quarter gross domestic product] result,” said BMO Nesbitt Burns deputy chief economist Doug Porter, in a commentary.

The Canadian dollar, reacting to the possibility of higher interest rates, gained almost half a cent to US89.58¢.

Statistics Canada said gasoline pump prices were 18.6% higher last month than they were in May 2005, as the cost of crude oil continued to soar. Excluding energy prices, the 12-month change in inflation was 1.8% in May, compared with 1.6% in April.

On a monthly basis, consumer prices increased 0.5% on average in May, the same pace as recorded in April and March, thanks to higher prices for traveller accommodation and electricity.