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By Theophilos Argitis

Canadian inflation continued to ease in May, with a key gauge of price pressures at the lowest since 1999, a trend that will challenge the Bank of Canada’s recent efforts to set the stage for a rate increase.

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The consumer price index rose 1.3 per cent in May from a year ago, down from an annual pace of 1.6 per cent in April, Statistics Canada reported Friday from Ottawa.

Exhibit A for why the Bank can takes it sweet time before raising rates Douglas Porter, BMO chief economist

Measures of annual core inflation, a key indicator tracked by the Bank of Canada that excludes volatile components such as gasoline, fell to the lowest in almost two decades. The average of the central bank’s three core measures declined to 1.3 per cent, the lowest since March 1999.

Key Points

The Bank of Canada last week began to play down sluggish inflation numbers, suggesting they were simply capturing the lagged effects of past excess capacity. But the numbers are below their forecasts. Inflation for the first two months of the second quarter is averaging 1.5 per cent, versus Bank of Canada forecasts of 1.7 per cent.

Economists surveyed by Bloomberg had forecast inflation would slow to 1.5 per cent from 1.6 per cent in April on lower gasoline prices.