Inflation rate dropped to 3.4% in May. What that means for the Bank of Canada – National

Inflation rate dropped to 3.4% in May. What that means for the Bank of Canada – National

The annual rate of inflation dropped sharply last month, but some economists argue a slowdown might not be enough to deter the Bank of Canada from another rate hike in July.

Statistics Canada said Tuesday that the annual inflation rate for May cooled by a full percentage point to 3.4 per cent.

Most economists had the headline inflation rate dropped significantly last month after reaching 4.4 per cent in April — a surprise uptick from 4.3 per cent the previous month and the first time the inflation rate rose in 10 months.

RBC Economics had expected a more modest drop to 3.6 per cent in the May inflation report.

Nathan Janzen, assistant chief economist at RBC, tells Motorcycle accident toronto today the “biggest factor” is the difference in energy price trends this year compared to last. Energy prices were down 12.4 per cent year-over-year in May, according to Statistics Canada.

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Prices for gasoline and oil spiked in the spring and summer of 2022 following Russia’s invasion of Ukraine. Janzen explains that with those price increases falling out of the annual inflation data, the year-to-year price growth will be diminished as a result.

Meanwhile, Statistics Canada said grocery price inflation remained elevated, rising 9.0 per cent year-over-year, a figure that was nearly unchanged from April.

Prices of edible fats and oils saw a 20.3 per cent jump, while costs were up 15 per cent for bakery products and 13.6 per cent higher for cereals, according to the agency.

Inflation on food purchased from restaurants accelerated in May, StatCan said, amid ongoing labour shortages feeding into service-sector employers.

Reports of ongoing food inflation pressures in May come the same day the Competition Bureau released the results of its probe into concentration in Canada’s grocery sector, which found a lack of competition is driving prices higher.

Rising mortgage costs tied to the Bank of Canada’s higher interest rates were once again the biggest contributor to the monthly CPI figures, StatCan said. The mortgage cost index rose 29.9 per cent annually, setting a new high for the largest increase on record for the third consecutive month.

Prices for cellular services meanwhile dropped 8.8 per cent year-over-year, the biggest decline since April 2022. Furniture prices were also down 2.9 per cent, and the 3.2 per cent price increase for passenger vehicles was the smallest increase since February 2021.

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Parliamentary Committee finds grocers not entirely to blame for high food prices


What will the Bank of Canada do?

Janzen says Tuesday’s CPI release is a “very significant report” for the Bank of Canada in weighing whether it needs to deliver another shock to the economy with a second consecutive rate hike in July.

He says that the Bank of Canada won’t pay too much heed to the decline in the annual figures because of how much it’s tied to last year’s higher prices. Instead, he says policymakers will pay closer attention to the shorter-term monthly trends and the central bank’s preferred “core measures” of inflation in deciding whether enough steam has been taken out of price pressures.

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The Bank of Canada’s preferred measures for CPI-median and CPI-trim declined modestly from April to May, though they remain elevated at 3.9 per cent and 3.8 per cent, respectively.

CIBC senior economist Andrew Grantham said that these metrics continue to “run hotter,” but declined below the consensus of economists’ expectations — that might sway the central bank to “wait a little longer” than July before delivering another possible interest rate hike.

Janzen notes that inflation tends to be a “lagging indicator” — showing the results of what’s already come to pass in the economy.

“Every inflation metric remains far above the two per cent inflation target,” Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist, said in a note Tuesday. “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.”

Randall Bartlett, senior director of Canadian Economics, echoed this sentiment.

“We continue to be of the view that the Bank of Canada will hike by another 25 basis points in July, while leaving the door open to further tightening if the data fails to cooperate over the summer,” he said in a report Tuesday.

Other economic releases in the calendar ahead of the July 12 rate decision such as the June jobs report and the Bank of Canada’s own business outlook survey will inform whether it’s done enough to keep bringing inflation down all the way to the two per cent mark.

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“Those are all indicators that they’ll use to tell them where inflation is going in the future, not just where it is today,” he says.

Janzen adds that there will have to be significant signs of slowing in these economic releases for the Bank of Canada to return to its pause. If policymakers didn’t think 425 basis points of policy rate tightening was enough, he says it’s not likely an extra 25 basis points will satisfy the central bank that inflation is set to return to two per cent.


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