OTTAWA, June 25 (Reuters) - Canada's annual inflation rate unexpectedly accelerated to 2.9% in May, largely on higher prices for services, while key measures of core inflation edged up for the first time in 5 months, data showed on Tuesday, in an unfavorable reading for July interest rate cut prospects.
Analysts polled by Reuters had forecast inflation to cool to 2.6% from 2.7% in April. Month-over-month, the consumer price index was up 0.6%, exceeding a 0.3% rise forecast.
The surprise acceleration in headline inflation was driven by price for services including cellular services, travel tours, rent and air transportation, Statistics Canada said.
CPI-median and CPI-trim - the Bank of Canada's preferred measures of underlying inflation - rose for the first time since December, contrary to market expectations. CPI-median sped up to 2.8% from 2.6% in April while CPI-trim accelerated to 2.9% from 2.8%.
Economists had forecast CPI-median to remain at 2.6% and CPI-trim to be 2.8%.
Citing progress in bringing down inflation, the central bank lowered its policy rate to 4.75% earlier this month and said decisions to ease further would be dependent on data and taken one at a time.
Headline inflation is in line with the Bank of Canada's forecast of 2.9% by the end of the first half of 2024. The bank will have another month of inflation data before its next rate announcement on July 24, when money markets see a nearly 70% chance of a rate cut.
In May, grocery price growth accelerated for the first time since June 2023, Statscan said, noting that prices for groceries have risen 22.5% compared with May 2020. Annual energy price inflation slowed to 4.1% from 4.5% in April.
Excluding volatile food and energy, prices rose 2.9% compared with a 2.7% rise in April.
Overall, service prices increased 4.6% in May, compared with a 4.2% rise in April, while goods inflation remained at 1%.
Reporting by Ismail Shakil in Ottawa; Editing by Dale Smith
