Senior Director of Canadian Economics
Canada: Inflation Slowed in May but It’s Still a Long Way from 2%
- Total CPI inflation advanced by 3.4% over May of last year, down from a 4.4% print in April. This is the slowest pace of annual price growth since June 2021. On a month-over-month basis, the 0.1% (sa) gain is the smallest monthly move we’ve seen since February and is more closely aligned with the Bank of Canada’s 2% target than other recent prints. The new basket weights introduced this month provided a slight upward bias to the print.
- Energy prices were a big contributor to the improvement in headline CPI inflation in May, falling 12.4% relative to the year-ago level. Gasoline prices were down 18.3% from a year ago, while fuel oil and natural gas prices also made healthy contributions.
- At the same time, food prices remained stubbornly high in May at 8.3% over last year. Grocery price growth stayed roughly unchanged in May, up 9.0%, while inflation accelerated for food purchased at restaurants, hitting 6.8% in the month.
- Excluding food and energy, prices were 4.0% higher in May than they were a year earlier—a meaningful deceleration from April’s 4.4%, but still uncomfortably high. Elevated shelter costs remain a big part of the story (4.7%), particularly mortgage interest cost (29.9%), but services inflation excluding shelter remains troublingly high as well. Moreover, Statistics Canada noted that there was an atypical decline in cellular services which dragged core inflation down more than it would have been otherwise.
- On a monthly basis, CPI excluding food and energy decelerated two ticks from the April pace to +0.1% (sa). That caused the three-month annualized rate of inflation in this traditional measure of core CPI to decelerate to 3.6% from 4.2% in April.
- Notably, the Bank of Canada’s key measures of core CPI inflation – the trimmed mean and median – decelerated to 3.8% and 3.9% in May, respectively, from around 4.2% in April. Meanwhile, on a three-month, annualized basis—a better gauge of current price pressures—the average of the Bank of Canada’s core trim and median measures to about 3.7% from 3.9%. In contrast, on a 3-month annualized basis, core services excluding shelter accelerated 4.9% from 4.7% in April.
Most measures of CPI inflation moved in the right direction in May. That’s the good news. But price growth in Canada is still too high, and the acceleration in 3-month annualized core services excluding shelter is particularly troubling. This means that demand remains too elevated to get inflation sustainably back to the Bank of Canada’s 2% target. Our tracking of Q2 2023 real GDP growth of around 2% annualized versus the Bank’s April forecast of 1% is evidence of as much (see our latest Economic & Financial Outlook for more information on our forecast). Add to this a tight labour market and solid growth in consumer spending, as suggested by the strong preliminary retail and wholesale sales’ prints. Taken together, 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.
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