OTTAWA (Reuters)

Canada’s annual inflation rate in May was unchanged from the previous month at 1.7% as a drop in gasoline costs continued to keep the overall index stable while prices of shelter, food and transportation also cooled, data showed on Tuesday.

There are concerns that a raft of tariffs imposed by Trump on steel, aluminum and automobiles exported to the U.S. from Canada and subsequent counter-measures from Canada would increase prices across the board.

Those fears have not been reflected in the headline consumer price index as a tax removal on gasoline from April is expected to keep the cost at the pump down for a year. Mortgage costs and rents have also consistently eased.

Analysts surveyed by Reuters had expected annual inflation in May to be at 1.7% and monthly inflation at 0.5%.

StatsCan said inflation in May on a monthly basis was at 0.6%, largely led by a seasonal increase in travel, accommodation and energy costs.

Gasoline prices decelerated by 15.5% in May after falling by 18.1% in April on an annual basis.

The cost of shelter component of the CPI, which has the biggest weight of 30% in the overall basket, grew by 3% in May, down from 3.4% in April, as both mortgage interest costs and rents eased.

The Bank of Canada closely tracks core measures of inflation – CPI-trim and CPI-median – and both of them eased to 3%, which is the upper band of the central bank’s 1% to 3% inflation target range.

The May and June inflation data are critical for BoC’s rates decision on July 30. If inflation continues to be low, it could tilt the bank towards a rate cut. The bank will also get April’s GDP report before its next meeting.

“This piles a lot of pressure on to the upcoming GDP report,” said Andrew Kelvin, Chief Canada Strategist at TD Securities, adding that if the economy slows materially in April, there could be a possibility of a rate cut.

After cutting rates aggressively and consistently for nine months since June last year by 225 basis points to 2.75%, it has paused its rate reduction cycle at its last two meetings, especially due to the uncertainty hanging around tariffs.

Money markets are betting around a 68% chance of yet another hold by the central bank of its policy rate at 2.75% on July 30, when it also releases its monetary policy report.

The Canadian dollar weakened slightly after the data and was trading up 0.1% to 1.3717 against the U.S. dollar, or 72.90 U.S. cents. Yields on the government’s two-year bonds were up 2.4 basis points to 2.637%.