TORONTO _ The loonie jumped dramatically Friday, as Canada's annual inflation rate rose higher than expected last month _ and above the Bank of Canada's target.
The Canadian dollar rose 0.60 of a cent to 93 cents US.
Statistics Canada reported that inflation rose to 2.3 per cent in May, bumped up by a continuing rise in energy prices. It's the first time the rate has surpassed the central bank's two-per cent target in more than two years.
Economists had been expecting the rate to come in slightly above April's reading of two per cent. The underlying core inflation reading was 1.7 per cent.
Bank governor Stephen Poloz had recently dismissed rising inflation data as temporary, and instead said he believed that Canada was at risk of returning to too low inflation. Economists interpreted Poloz's position to show that the central bank is not in any rush to raise interest rates, which has kept the Canadian dollar lower and has helped the country's export sales.
But the emerging view among analysts is that while there is little danger of runaway inflation, the risk of disinflation has also largely gone given the continuing strength in oil prices and expectations of a growing economy in the U.S. and Canada.
``The low inflation ship has sailed,'' wrote BMO Capital Markets chief economist Doug Porter in a note.
``While both core and headline inflation have been pumped up by the early-year slide in the Canadian dollar, there is more than just food, fuel and the currency at play... Concerns about too-low inflation? So last quarter.''
Rahim Madhavji of Knightsbridge Foreign Exchange agreed, writing in a note that this latest data is too strong for the Bank of Canada to ignore.
``The strong Canadian data makes it difficult for the Bank of Canada to remain neutral or hawkish when it comes to interest rate policy,'' he wrote. ``The strong data will eventually force the Bank of Canada to indicate rates will rise sooner rather than later.''
Meanwhile, there was yet another sign of an improving Canada economy Friday.
Statistics Canada says retail sales rose for the fourth consecutive month in April, increasing 1.1 per cent to $41.6 billion. The agency says gains were widespread as 10 of 11 subsectors, representing 98 per cent of retail trade, posted increases. Economists had expected a gain of 0.6 per cent, according to Thomson Reuters.
The biggest gain came from car sales, which rose 2.4 per cent, while sales of clothing and clothing accessories stores rose 1.5 per cent, after declining in March.
Higher oil prices due to the geopolitical instability in Iraq also continued to help support the Canadian dollar.
On Thursday, U.S. President Barack Obama said he was dispatching up to 300 U.S. military advisers to help quell the insurgency in Iraq. Though not specifically mentioning airstrikes, Obama also said he was leaving open the possibility of ``targeted and precise military action'' in the future.
Iraq's government is trying to hold off the insurgents at the Beiji oil refinery. By late Thursday the two sides held different parts of the refinery, which extends over several square kilometres of desert some 250 kilometres north of Baghdad.
The facility has a capacity of 320,000 barrels a day, according to Platts, accounting for a quarter of Iraq's refining capacity. While all its output is used domestically, a prolonged shutdown could force the energy producer to import oil products to keep up with the country's needs, cutting into global supplies.
The al-Qaida group have already seized a number of areas in the northern part of the country, including Iraq's second-largest city, Mosul, a key gateway for Iraqi oil.
The July crude contract advanced 53 cents to US$106.96 a barrel. August gold bullion gained $41.40 to US$1,314.10 an ounce, while July copper rose two cents to US$3.08 a pound.
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