The annual rate of inflation declined sharply last month, but some economists argue the slowdown may not be enough to prevent the Bank of Canada from another rate hike in July.
Statistics Canada said Tuesday that the annual inflation rate for May dropped a full percentage point to 3.4 per cent.
Most economists say the headline inflation rate dropped significantly last month after reaching 4.4 percent in April — a surprise increase from 4.3 percent the previous month and the first time the inflation rate rose in 10 months.
RBC Economics had expected a modest decline of 3.6 percent in its May inflation report.
RBC assistant chief economist Nathan Janzen tells Global News that “the biggest factor” is the difference in energy price trends this year compared to last year. According to Statistics Canada, energy prices were down 12.4 per cent year-over-year in May.
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Gasoline and oil prices soared in the spring and summer of 2022 following Russia’s invasion of Ukraine. Jenzen points out that with those price increases being factored out of the annual inflation data, year-over-year price increases will come down.
StatCan said rising mortgage costs linked to higher interest rates from the Bank of Canada were once again the biggest contributor to the monthly CPI data. The mortgage cost index rose 29.9 percent annually, setting a new high for the largest increase on record for the third consecutive month.
Meanwhile, cellular services prices fell by 8.8 per cent year-on-year, the biggest decline since April 2022. Furniture prices also declined by 2.9 percent, and a 3.2 percent price increase for passenger vehicles was the smallest increase since February 2021.
Meanwhile, Statistics Canada said grocery price inflation remained high, rising 9.0 per cent year-over-year, a figure that was virtually unchanged from April.
According to the agency, the prices of edible fats and oils saw an increase of 20.3 per cent, while the cost of bakery products was higher by 15 per cent and cereals by 13.6 per cent.
Michael von Maso, professor of food economics at the University of Guelph, told Global News that while some pressures on the grocery store are easing, others are increasing to keep inflation steady.
For example, von Maso says food shipments from the U.S. have been less affected by the weather and the stronger Canadian dollar is making imports cheaper for retailers.
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But the delay in Canada’s own growing season is reducing the availability of affordable fresh vegetables, which usually hit the market around this time of year, he added.
Asparagus and strawberries coming to market from Ontario have been delayed a week or two amid a “cold, wet spring,” he says, which means most of these fruits and vegetables are still being imported from outside the country. Have been
Von Maso says that in his home, he carefully tracks the growing season to plan shopping habits around sourcing cheap, locally grown produce.
“We eat very little asparagus in December because it comes from far away and we spend money on asparagus at this time of the year because it is cheap and easily available,” he says. “When things come on the market that can really have an impact on food price inflation.”
Meanwhile, inflation on food purchased from restaurants accelerated in May, StatCan said, adding that service sector employers are facing labor shortages.
The report of ongoing food inflation pressures in May came the same day the Competition Bureau released the results of its investigation into concentration in Canada’s grocery sector, which found a lack of competition is driving up prices.
What will the Bank of Canada do?
Janzen says Tuesday’s CPI release is a “very important report” for the Bank of Canada to see whether the economy needs another jolt with a second consecutive rate hike in July.
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He says the Bank of Canada won’t pay too much attention to the decline in annual figures because of how closely it correlates to last year’s high prices. Instead, he says policymakers will look closely at short-term monthly trends and the central bank’s favorite “key measures” of inflation to determine whether price pressures have been sufficiently relieved.
The Bank of Canada’s favorite measures for CPI-Median and CPI-Trim declined marginally from April to May, although they remained elevated at 3.9 per cent and 3.8 per cent, respectively.
Andrew Grantham, senior economist at CIBC, said these metrics continue to “run at a bullish pace” but fall short of a consensus of economists’ expectations – which compares to July before the central bank delivered another potential interest rate hike. may prompt me to “wait a while”.
“Every inflation metric remains well above the two per cent inflation target,” Benjamin Reitz, managing director of Canadian rates and macro strategist at BMO, said in a note Tuesday. “Accordingly, Bank of Canada policymakers will not heave a big sigh of relief following this report as core inflation remains stable and has not yet shown signs of a durable recession.”
Randall Bartlett, senior director of Canadian economics, echoed this sentiment.
“We believe the Bank of Canada will hike rates by 25 basis points in July, while leaving the door open for further tightening if data fails to cooperate over the summer,” he said in a report on Tuesday. “
Janzen says that inflation is a “lagging indicator” – showing the result of what has already happened in the economy.
Other economic releases in the calendar ahead of the July 12 rate decision, such as the June jobs report and the Bank of Canada’s own business outlook survey, will reveal whether enough has been done to bring inflation down to the two per cent level.
“Those are all indicators they’ll use to tell where inflation is going in the future, not just where it is today,” Jenzen says.
He further said that there should be significant signs of slowing in these economic releases for the Bank of Canada to return to its pause. If policymakers don’t think a 425 basis point cut in policy rates is enough, he says it is unlikely an additional 25 basis points will satisfy the central bank that inflation is set to return to two percent.
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