Canadian consumers paid 2.9% more in May than they did in May 2002 for the goods and services included in the Consumer Price Index basket, Statistics Canada reported Friday.

The 12-month increase continued to slow for the third consecutive month, as energy prices kept on falling from their recent highs. Excluding energy prices, the 12-month increase in the CPI was 2.7% for the second month in a row, after rising 3.2% in March.

“Digging beneath the surface, however, there was still little evidence of the ‘underlying firmness’ in core consumer prices that had the Bank of Canada in such a flap earlier this year,” comments TD Bank. “For one, the bulk of the increase in the core CPI in May reflects the end of the electricity refunds which pushed the core measure sharply lower in April. Excluding the impact of electricity prices, the core CPI recorded a benign 0.2% gain in May. But more importantly, the recent trend in core consumer prices has been extremely tame.”

“Overall, this result is consistent with an underlying slowing in Canadian inflation trends, although deflation is certainly no risk here at this time,” says BMO Nesbitt Burns. “It also fits into the Bank of Canada’s latest view that inflation is headed for their 2% target sooner than previously thought.”

TD predicts that core inflation will trend back towards the Bank of Canada’s 2% target over the next couple of months, and will likely continue to hover close to the 2% level for the remainder of 2003.

This leaves room for the Bank of Canada to cut interest rates further says TD. “In sum, looking beyond the wild swings in energy prices, there is not even a hint of inflationary pressures bubbling beneath the surface, which leaves the gates wide open for the Bank of Canada to cut interest rates in the months ahead,” it notes.

CIBC concludes, “While the Bank will likely have to throw in the towel and trim rates this year, they will want to undertake that about-face on monetary policy gradually, suggesting the first move towards lower rates likely lies beyond the July rate setting date.”