Inflation rate rises in April

Canada's annual rate of inflation rose to 1.8 per cent in April, up from 1.4 per cent in March, Statistics Canada said Friday.

For a sixth consecutive month, gasoline prices put the strongest upward pressure on the consumer price index.

In April, prices at the gas pumps were 16.3 per cent higher than in April 2009. That followed a 17.2 per cent rise in the 12 months to March, Statistics Canada said.

Higher car prices also put upward pressure on the index for the fourth consecutive month in April. Passenger vehicle prices increased 5.3 per cent following a 3.9 per cent increase in March.

Core rate higher

Core prices, factoring out several volatile components such as energy and food, advanced 1.9 per cent over the 12 months to April, following a 1.7 per cent rise in March.

The core rate is closely watched as it is used by the Bank of Canada in setting its monetary policy. The central bank has an interest rate announcement scheduled for June 1.

Indications of rising price pressures could lead the bank to push the cost of borrowing money higher after months of rock-bottom lending rates. The Bank of Canada's key overnight rate has been 0.25 per cent for more than a year.

"The economic data are still landing heavily in favour of rate hikes," BMO economist Doug Porter said Friday.

"If the decision was based solely on domestic factors, there would now be precisely zero debate on whether the bank will raise rates on June 1."

Euro anxiety muddles rate outlook

But instability in Europe because of sovereign debt fears muddies the picture, so the bank may opt to stand pat, he said.

"While the economic data continue to lean heavily to a rate hike, the decision will ultimately be driven by just how intense the financial storm becomes," Porter said.

Vancouver-based Citizens Bank, in a commentary, took the view that rates won't rise next month.

It said the loonie's fall over the last week is linked to traders selling their Canadian dollar positions in the belief that the Bank of Canada won't raise interest rates on June 1.

The stronger-than-expected inflation data didn't immediately boost the value of the Canadian dollar, something the bank commentary blamed on traders' "complete disregard for fundamental economic factors."

However, after dipping to barely 93 cents US late in the morning, the loonie pulled up in the afternoon and its official close was 94.40 cents US, a gain of 0.75 cent from Thursday.