The pace of inflation slowed in May thanks to a year-over-year drop in energy prices, Statistics Canada said Thursday.

Consumer prices rose 0.1% in the 12 months to May 2009, down from the 0.4% increase in April.

Economists had expected a 0.2% drop, year-over-year.

The slowdown in the 12-month consumer price index was primarily the result of an 18.3% year-over-year price drop for energy products. Excluding energy, the CPI rose 2.3%.

“Gyrations in energy prices continue to be a heavy influence on the direction of Canada’s inflation rate,” commented Dawn Desjardins, assistant chief economist at RBC Economics Research.

Gasoline prices fell 25.1% from May 2008 to May 2009 following a 12-month decline of 24.7% in April. But Canadians paid more when May 2009 is compared to April 2009. On a month-to-month basis, gasoline prices rose 8.3% from April to May.

Food costs rose 6.4% in the 12-months to May, following a 7.1% increase in April. Statistics Canada said the one-year rise seen in May was the slowest rate of growth since October 2008.

The Bank of Canada’s core rate of inflation advanced 2% over the 12 months to May, up from the 1.8% rise posted in April.

On a monthly basis, the overall consumer price index rose 0.2% from April to May, after falling 0.2% from March to April.

Economists at BMO Capital Markets note that Canada’s modest inflation rate represents one of the highest levels among the major economies around the world, with negative headline inflation rates in the U.S., Japan and China, and a rate of zero in the Eurozone. It shows particular contrast against the U.S., where consumer prices fell by 1.3% in May.

But the positive rate is not likely to continue in the months ahead, many economists say. “As unemployment rises and machines go idle, Canada’s widening output gap will place additional downward pressure on core inflation and all-item CPI should fall into negative year-over-year territory within the coming months,” said economist Grant Bishop at TD Economics.

IE