By Paul Vieira

OTTAWA--Canada's annual rate of inflation rose in May at its fastest pace in over two years and exceeded the Bank of Canada's closely watched 2% target, powered by increases in energy and meat costs.

The May report from Statistics Canada on Friday is likely to increase pressure on the Bank of Canada to alter its inflation outlook that currently emphasizes the risks of low inflation, although Governor Stephen Poloz might choose to look past these latest results and focus on risks posed by uncertainty in China and Europe.

Canada's all-items consumer-price index in May rose 2.3% on the year. That rate compares with market expectations of a 2% rise, according to economists from Royal Bank of Canada. In April, annual inflation sped to 2%.

The annual core rate of inflation, which excludes volatile components such as some food and energy prices, was 1.7% in May, also ahead of market expectations, which were for a 1.5% gain in prices. Core inflation sped at its fastest pace in nearly two years. The rate the previous month was 1.4%.

Month to month, both headline and core prices rose 0.5%.

Prices in May rose at their fastest since February 2012, and the back-to-back annual inflation gains of 2% or more emerge after inflation remained below that level for nearly two years.

The Bank of Canada sets its policy lending-rate at a level to achieve and maintain 2% inflation. But a second straight month of frothy price gains are unlikely to persuade Mr. Poloz to change course and maintain a neutral stance on interest rates.Earlier, this month, Mr. Poloz said a weak U.S. economy and uncertain conditions in China and Europe are reasons to flag downside risks to inflation.

"The level of uncertainty surrounding the economic recovery is elevated, " Sebastien Lavoie, economist at Laurentian Bank Securities, said in a note in advance of the May CPI report, adding the recent return to 2% inflation has been partly triggered by price increases approved by energy regulators.

The central bank, Mr. Lavoie said, "will not endanger the broader economic recovery to taper off the higher total CPI inflation figures."

Economists say the core rate, because of the exclusions, provides policy makers with a better picture of the pace of price increases and the forward-looking trend. However, core this month rose at a faster-than-expected rate.

The Canadian dollar strengthened following the release of the inflation report. The U.S. dollar was at C$1.0766 earlyFriday, down from C$1.0817 late Thursday.

Risks of slower inflation remain a concern for central bankers in the developed world, with policy makers in Europe, for instance, implementing new, unconventional measures to combat the risk of deflation.

Federal Reserve Chairwoman Janet Yellen has said inflation in the U.S. has been on the high side but added data were "noisy." She added the Fed might tolerate inflation overshooting its 2% goal if the U.S. economy were still far from the Fed's goal of maximum employment.

The Canadian data agency said on Friday that annual prices rose in all components tracked. The year-over-year rise in inflation was paced by energy prices, which as a group rose 8.4%, matching the previous month's gain. Gasoline prices rose 6.3%, while natural gas costs surged 21.3%. Electricity prices also rose 7%. Excluding energy, CPI rose 1.7%.

Food prices rose 2.3% in May, led by a 8% increase in the costof meat. Meanwhile, shelter costs climbed 3.4%, and transportation costs increased 2.7%. On a seasonally-adjusted basis, CPI rose 0.2% in May, following a 0.3% rise in the previous month.

(END) Dow Jones Newswires

June 20, 2014 09:36 ET (13:36 GMT)

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