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Canada's inflation surprises higher in May, casting doubt on a July rate cut

Statistics Canada is set to release its January consumer price index report on Tuesday and forecasters expect Canada's inflation rate fell. A customer browses an aisle at a grocery store In Toronto on Friday, Feb. 2, 2024. THE CANADIAN PRESS/Cole Burston
Statistics Canada says services drove the inflation rate higher in May. (THE CANADIAN PRESS/Cole Burston) (The Canadian Press)

Canada’s annual inflation rate reaccelerated unexpectedly to 2.9 per cent in May while measures of core inflation also increased, according to Statistics Canada, reducing the odds of a Bank of Canada rate cut in July.

The increase came as a surprise to analysts, who had expected inflation to cool to 2.6 per cent from 2.7 per cent in April, according to a survey from Reuters. Statistics Canada said on Tuesday that acceleration was largely due to higher prices for services, which increased 4.6 per cent in May after a 4.2 per cent increase in April. The services price growth was led by cellular services, travel tours, rent and air transportation.

The Bank of Canada's closely watched measures of core inflation also edged up in May, again surprising analysts. CPI-median increased from 2.6 per cent in April to 2.8 per cent in May, while CPI-trim was up from 2.8 per cent in April to 2.9 per cent in May. Economists expected CPI-median to be 2.6 per cent, and CPI-trim to be 2.8 per cent.


"Inflation moved in the wrong direction in May," CIBC economist Katherine Judge wrote in a note on Tuesday.

"Overall, with the data showing much faster price pressures than expected, this casts a lot of doubt on the possibility of a July cut."

The surprise increase prompted money markets to cut bets of a rate cut when the Bank of Canada makes its next decision on July 24 to about 45 per cent, Reuters says, compared to over 70 per cent on Monday.

The Bank of Canada cut its benchmark interest rate for the first time in four years earlier this month, bringing it to 4.75 per cent, after the central bank said it gained confidence that inflation will continue to move closer to its two per cent target. On Monday, Governor Tiff Macklem reiterated that if inflation continues to ease, "it is reasonable to expect further cuts" but that the central bank will take its interest rate decisions "one meeting at a time."

While a rate cut in July remains on the table, the latest inflation data "won't instil any added confidence for the Bank of Canada," TD economist James Orlando wrote in a research note.

"Now, one bad inflation print doesn't make a trend, and inflation remained below three per cent. But it does speak to the unevenness of the path back to two per cent," Orlando said.

"For this reason, we think the BoC will likely pause at its July meeting, before cutting rates again in September."

Corpay chief market strategist Karl Schamotta wrote in a note on Tuesday that "the stage is set for a quarterly pace of easing in the year ahead."

"Another inflation print will land before policymakers meet in July, but we suspect an abundance of caution will see the next move land in September, matching the timing of the first rate cut from the Federal Reserve," Schamotta said.

On a monthly basis, the Consumer Price Index (CPI) increased 0.6 per cent in May. Seasonally adjusted, CPI rose 0.3 per cent for the month.

Grocery prices increased 1.5 per cent on an annual basis in May, up from 1.4 per cent in April, marking the first acceleration since last June. Month-over-month prices rose 1.1 per cent, the largest monthly increase since January 2023. The increase was driven by prices for fresh vegetables (up 3.5 per cent), fresh fruit (up 2.2 per cent) and meat (up 1.3 per cent). Statistics Canada noted that prices for food purchased from grocery stores are 22.5 per cent higher than in May 2020.

Rent prices continue to increase in Canada, with the national rent index rising 8.9 per cent in May, compared to 8.2 per cent in April. Mortgage interest rate costs were up 22.3 per cent on an annual basis in May.

With files from Reuters.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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