May's 2.9% inflation rate, up from 2.7% in April, raises questions about economic stability
The annual inflation rate unexpectedly increased in May, raising doubts about the Bank of Canada's next interest rate decision in July amid “bumpy and choppy” conditions, as reported by The Canadian Press.
Statistics Canada reported Tuesday that the annual rate rose to 2.9 per cent in May, up from 2.7 per cent in April. This rise follows the BoC's recent decision to cut its benchmark interest rate by a quarter of a percentage point to 4.75 per cent.
TD Bank senior economist James Orlando described the inflation report as “disappointing” due to increases in both core and overall inflation.
“One bad inflation print doesn’t make a trend, and inflation remained below three percent. But it does speak to the unevenness of the path back to two percent. For this reason, we think the BoC will likely pause at its July meeting before cutting rates again in September,” he noted.
The BoC will make its next rate decision on July 24, alongside publishing its latest economic outlook in the monetary policy report. Following the inflation report, financial markets indicated lower odds of a rate cut in July.
However, Olivia Cross, North America economist at Capital Economics, pointed out that some of the inflation increase might be due to temporary factors. With another inflation report due before the late July meeting, she remains optimistic about a rate cut next month.
She wrote, “While the latest release increases the chances of the bank pausing at its July meeting, the other major data releases before then — including the June CPI release — could influence the bank’s decision.”
In addition to June inflation figures, Statistics Canada will release April's gross domestic product figures and June's labour force survey. The BoC will also release its business outlook survey and Canadian survey of consumer expectations on July 15.
Dawn Desjardins, chief economist at Deloitte Canada, emphasized that the central bank will carefully examine upcoming data. “The Bank of Canada has acknowledged it's going to be bumpy and choppy. But overall, it’s not enough to completely step back from rate reductions,” she remarked.
A summary of the BoC’s governing council discussions about its June rate decision revealed that the central bank considered delaying the rate cut until July but chose to act earlier.
The summary stated, “While they recognized the risk of stalled progress — similar to the United States — they agreed that four consecutive months of easing core inflation and indicators of continued downward momentum justified the initial policy rate cut.”
Statistics Canada indicated that May's inflation increase was driven by a 4.6 per cent rise in service prices from the previous year, up from a 4.2 per cent increase in April. Goods prices grew at the same rate as in April, at one per cent.
Mortgage interest costs rose 23.3 per cent year-over-year, while rent prices increased by 8.9 per cent. Travel tour prices in May rose 6.9 per cent from the previous year, and air transportation prices increased by 4.5 per cent. Gasoline prices climbed 5.6 per cent year-over-year.
Grocery prices saw a 1.5 per cent year-over-year increase in May, slightly higher than the 1.4 per cent increase in April. This marked the first acceleration in grocery prices since June last year. Statistics Canada noted that consumers are now paying 22.5 per cent more for groceries compared to May 2020.
