Canada May CPI: getting there

Canada's consumer price index came in slightly lower than expected in May, according to data released this morning by Statistics Canada. Headline CPI rose 3.4 percent from a year earlier, a full percentage point lower than the April reading and the lowest yearly increase since June 2021.

As has been the case for several months now, much of the change in the yearly rate reflects the so-called base effect, as outsized monthly gains from the first half of 2022 fall out of the calculation. In May the base effect was most notable for gasoline, where the price last month was 18 percent lower than in May 2022. If gasoline is excluded, the yearly rise in CPI fell to 4.4 percent in May from 4.9 percent a month earlier.

Other closely watched components of the overall price index continue to rise uncomfortably quickly. For the third straight month, the largest single contributor to the monthly increase came from mortgage interest costs, up 29.9 percent from a year ago. It hardly needs be pointed out that this is the direct result of the Bank of Canada's interest rate hikes. Food prices are also rising much faster than headline inflation, up 9 percent from a year ago, only marginally slower than in April. 

There are some positive elements in the release from the Bank of Canada's perspective. Seasonally adjusted headline CPI, which surged 0.6 percent month-on-month in April, rose only 0.1 percent in May, though both monthly figures were distorted by the gyration in gasoline prices. The Bank's three preferred measures of core inflation all decelerated noticeably in May, with the mean reading falling to 4.3 percent from April's 4.7 percent. 

It is unlikely that today's numbers will deter the Bank from raising rates by a further 25 basis points in July, though a weak real GDP print for May (data due this coming Friday) could just possibly tilt the balance. It seems unlikely that the Bank ended its "conditional" pause at its last meeting with the intention of only making one tightening move. Moreover, it should be recalled that although today's numbers are encouraging, they are exactly in line with the Bank's expectations: Governor Tiff Macklem and others have repeatedly forecast that headline CPI would fall close to 3 percent by mid-year, exactly what we now see happening. 

The Bank's concern is that getting inflation all the way back to the 2 percent target is likely to be more challenging, not least because the benign impact of the base effect is almost over. Expect another 25 basis point rate hike in July, very possibly accompanied by another "conditional" pause to give the Bank more time to judge the impact of its policy actions.