Yahoo Finance Inflation slows to 3.4 per cent annual increase in Canada
Inflation in Canada increased 3.4 per cent in May, the smallest rise since June 2021, providing Canadians with some relief from skyrocketing prices.
The slowdown in the Consumer Price Index (CPI) released Tuesday by Statistics Canada also provides some relief for the Bank of Canada, bringing a small dip in the odds that the central bank will increase its benchmark interest rate next month, although a hike is still the more likely scenario.
Gas prices fell 18.3 per cent in May compared to the same month last year, when Russia's invasion of Ukraine led to uncertainty about supply and a spike in energy prices. On a monthly basis, gas prices fell 0.8 per cent after a 6.3 per cent jump in April.
But other price pressures remain elevated, with rising mortgage interest contributing the most to the annual increase in CPI. Higher travel accommodation and tour costs contributed to the month-over-month increase, and food prices continue to surge in Canada.
And Canadians have yet to see price relief at the grocery store, with food purchased from stores jumping 9 per cent annually in May, nearly flat compared to April's 9.1 per cent increase. The prices of edible fats and oils were up 20.3 per cent in April, while bakery products jumped 15 per cent and cereal products were up 13.6 per cent.
While May's increase brings inflation closer to the Bank of Canada's previous forecast that CPI would ease to around 3 per cent by mid-year, it remains above its target of 2 per cent.
"Accordingly, Bank of Canada policymakers won't [breathe] a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown," BMO macro strategist Benjamin Reitzes wrote in a research note on Tuesday.
"The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next two weeks, a hike still looks likely."
Money markets now see a 56 per cent probability of a hike of 25 basis points on July 12, down from 64 per cent before the release of inflation data. They see nearly a 100 per cent chance for a quarter-point move in September.
Challenges remain for the BoC
The increase in CPI was down from April’s surprise 4.4 per cent jump, the first time inflation had accelerated since June 2022, and in line with analyst expectations. Economists surveyed by Bloomberg had expected inflation to slow its pace to a 3.4 per cent increase year-over-year in May.
Excluding gasoline, CPI increased 4.4 per cent, also a slower pace than the 4.9 per cent jump in April. On a monthly basis, CPI increased 0.4 per cent, or a seasonally adjusted 0.1 per cent.
"Overall, today's data don't change the fact that inflation is running hotter than the Bank's prior April (Monetary Policy Report) forecasts," CIBC economists Andrew Grantham and Katherine Judge wrote in a research note.
"However, the tamer core readings suggest that policymakers may be able to wait a little longer rather than following up June's hike with another move as early as July, and we therefore continue to expect policymakers to wait until September to deliver a final 25 basis point hike."
Royce Mendes, Desjardins' head of macro strategy, wrote in a note on Tuesday that excluding food and energy, the deceleration in inflation "looked more modest" and the Bank of Canada's preferred core measures "showed little progress towards bringing inflation to heel."
"Don’t be fooled by the sharp drop off in the headline inflation rate; underlying consumer prices growth is still running at a heady pace in Canada," Mendes wrote.
"With measures of recent price growth continuing to run above 3.5 per cent, it looks almost like a done deal that the Bank of Canada will raise rates another 25 basis points in July. The sticky inflation data builds a strong case for further monetary tightening, which was bolstered by a series of hot flash estimates on retailing, wholesaling and factory activity."
Note: This story has been updated to reflect that travel tours and traveller accommodations were top contributors to the month-over-month increase in CPI, not year-over-year as previously implied.
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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