Inflation unexpectedly surged in Canada, a setback for policymakers as they weigh further interest rate cuts next month.
The consumer price index rose 2.9 per cent in May from a year ago, up from 2.7 per cent a month earlier, primarily due to higher prices for services, Statistics CanadareportedTuesday in Ottawa. That was faster than the median estimate of 2.6 per cent in a Bloomberg survey of economists.
On a monthly basis, the index climbed 0.6 per cent, versus expectations for a 0.3 per cent gain and up from 0.5 per cent in April. On a seasonally adjusted basis, inflation rose 0.3 per cent.
The Bank of Canada’s two core inflation measures also accelerated, averaging a 2.85 per cent yearly pace — faster than economists expected.
Tuesday’s data broke a four-month string of easing price pressures. The reacceleration of both headline and core inflation will likely caution the central bank against a second consecutive interest rate cut next month, as officials seek to understand whether the latest setback is temporary.
“The inflation path remains uneven, which means the rate cut path likely won’t be smooth either,” Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said by email. “While we won’t rule out a July cut, the odds just fell notably.”
The Canadian dollar jumped on the release but pared some gains to trade at $1.3647 per U.S. dollar as of 9:24 a.m. Ottawa time. The yield on 2-year Canada bonds rose about nine basis points on the day to four per cent.
Governor Tiff Macklem and his officials lowered the benchmark overnight rate by 25 basis points to 4.75 per cent earlier this month, the first Group of Seven central bank to kick off an easing cycle. After seeing several months of cooling price pressures, they said they were more confident inflation was headed to the two per cent target and that monetary policy no longer needed to be as restrictive.
Tuesday’s inflation release is the first of two such reports before the next Bank of Canada rate decision on July 24. The majority of economists in a Bloomberg survey expect policymakers to hold borrowing costs steady at that meeting before easing again at the next meeting in September.
“The lack of progress in May reduces the likelihood that the Bank of Canada will cut in July. But with another CPI release before the July decision, the door is not completely closed,” Charles St-Arnaud, chief economist at Alberta Central, said in an email.
Macklem reiterated on Monday that it’s reasonable to expect further reductions in the policy interest rate if price pressures continue to ease. But officials don’t want to lower rates too quickly and jeopardize progress on inflation.
A three-month moving average of the inflation rate rose to an annualized pace of 2.52 per cent, from 1.64 per cent in April, according to Bloomberg calculations.
Shelter, food inflation
In May, mortgage interest costs and rent remained the biggest contributors to the annual change in the rate of inflation. Mortgage interest costs jumped 23.3 per cent and rent rose 8.9 per cent on a yearly basis. Excluding shelter costs, the consumer price index rose 1.5 per cent from a year ago, versus 1.2 per cent in April.
Excluding food and energy, the index rose 2.9 per cent from a year ago, up from 2.7 per cent. Services inflation was up 4.6 per cent, compared with 4.2 per cent in April.
Food prices rose 2.4 per cent, versus 2.3 per cent in April. Groceries increased 1.5 per cent from a year ago, the first acceleration since June 2023, and rose 1.1 per cent from the previous month — the biggest monthly gain since early last year.
Regionally, prices increased at a faster pace from a year ago compared with April in six of 10 Canadian provinces, including Ontario and Quebec.
The release incorporates new basket weights from Statistics Canada, but they didn’t impact the headline yearly CPI change, the agency’s analysts said.
What Bloomberg Economics says
"Reaccelerating inflation argues for the BoC cutting rates only slowly. One poor inflation report isn’t a trend, but we think the BoC will remain on hold at the July 24 meeting. With upside risks to inflation coming from home prices — which could rise as interest rates fall — and with only limited room to diverge from the Fed, we think the BoC will cut its overnight-rate target at just a quarterly cadence."
— Stuart Paul, economist
