Even worse than expected

Canada's headline CPI rose 7.7 percent in the year to May, up from 6.8 percent in April, according to new data released by Statistics Canada this morning. This was worse than the already-gloomy analysts' consensus, and represents the highest increase in overall consumer prices since January 1983. The month-on-month rise in prices was a startling 1.4 percent in May, up from 0.6 percent in April.

Gasoline and food prices continue to be the main drivers of headline inflation. Gasoline prices, which  rose 12 percent in May alone (48 percent year-on-year), were the largest single contributor to the monthly figure. Food prices rose 0.8 percent in the month for an annual increase of 8.8 percent, in line with the prior month's reading.

These may be the main culprits, but in truth inflation pressures are broad-based. All eight components tracked by StatsCan were higher on both an annual and a monthly basis in May. Excluding food and energy, CPI rose 0.9 percent in the month of May and 5.2 percent for the year, not numbers that can give any comfort to policymakers at the Bank of Canada as they pursue their 2 percent inflation target.

Speaking of the central bank, its preferred measures of core inflation also continued to misbehave in May. All three of these measures moved higher in May, with the mean reading rising yet again to stand at 4.7 percent, up from 4.4 percent in April.  It might be noted that every single measure of inflation, including these aggregates, stands well above the 3.9 percent increase in average hourly earnings; this is not (yet) a wage-price spiral. 

Gasoline prices have moved slightly lower across the country so far in June, which may provide some relief for headline CPI for the month. On the other hand, utilities are preparing to make major increases in natural gas prices, which have been relatively stable until now.  There is scant reason to expect any relief on the price front any time soon, so a further substantial rate increase from the Bank of Canada -- 50 or even 75 basis points -- looks to be locked in.