Oops!

Heading into this morning's release of Canada's CPI data for May, the analysts' consensus was looking for another small decline in the year-on-year headline inflation rate, largely on the basis of slightly lower gasoline prices during the month. In the event, the data provided a nasty surprise: headline CPI ticked up to 2.9 percent in May from April's 2.7 percent reading. The details of the report suggest that while inflation pressures are now much less intense than they were a year ago, they remain fairly broad-based, particularly in the services sector. 

Prices for services rose 4.6 percent from a year ago, up from 4.2 percent in April. The increase was partly driven by normal seasonal pressures, for example prices for travel tours and air transportation. Rent also contributed to the monthly increase, and the shelter sub-index is now the fastest growing component of the overall number, rising 6.4 percent from a year ago.  In contrast to the seeming intractability of services inflation, goods prices remain well-controlled, rising 1.0 percent in May from a year ago, the same pace as in April. That said, the 0.9 percent month-on-month jump in food prices will undoubtedly a red flag for policymakers.  

Most of the widely-followed special aggregates tell the same story: all items ex food, up 3.0 percent; ex food and energy, up 2.9 percent; ex energy, up 2.8 percent. As for the Bank of Canada's preferred core inflation measures, two of the three indices ticked higher in May while one moved lower, leaving their mean value at 2.7 percent. All in all it is tempting to conclude that if inflation is indeed stabilizing, it is doing so at a level near 3 percent rather than the 2 percent the Bank of Canada is aiming for.  

What are the policy implications?  The Bank of Canada's recent messaging can be summarized as "if inflation keeps moving lower, we can keep lowering our rate targets".  On that basis, today's data make a July rate cut less likely, and that was certainly the markets' reaction.  However, it is worth noting that June inflation data are due for release on July 16, ahead of the Bank's Governing Council meeting on July 24.  There will also be a full raft of data on the real economy between now and that latter date, including the all-important employment report and another month's GDP statistics.  Those numbers will doubtless play a big role in the Bank's decision-making process, but if nothing else, today's numbers reinforce the message that policy-wise, everything is data-dependent.