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Randall Bartlett
Senior Director of Canadian Economics
Economic News
Canada: May Inflation Reaccelerates in an Upset Worthy of a Stanley Cup Final
June 25, 2024
Highlights
- Headline CPI rose 2.9% y/y in May, well above the expectations of economists (2.6%). Prices rose 0.6% m/m, but only 0.3% after adjusting for seasonal effects. Table 1 summarizes the key data points.
Implications
Bucking the trend of the last few months, the CPI inflation print came in well above the expectations of economists in May. A reacceleration in services inflation explains most of the headline move. Prices of travel tours, air transportation and groceries picked up on both a month-over-month and year-over-year basis. Meanwhile, the cost of cellular services fell again in May over the same month last year, but by much less than in April given the second consecutive month-over-month advance.
In better news, growth in shelter prices (6.4% y/y) was unchanged in May despite continuing to be the primary contributor to overall CPI inflation (graph 1). This was the result of lower owned accommodation inflation (6.2%) offsetting another month of accelerating rented accommodation costs (8.6%). Excluding shelter, inflation accelerated to 1.5% from 1.2% in April, although it’s been below the central bank’s 2% target for most of the past eight months. Lower gasoline prices in the month were also a positive for cash-strapped Canadian households.
Turning to underlying inflation, the Bank of Canada’s preferred measures of core CPI year-over-year price growth—median and trimmed mean—accelerated in May but managed to stay under 3% y/y for the second consecutive month. On a 3-month annualized basis, these measures topped 2% for the first time since February, averaging about 2.5% (graph 2). Looking to the more universally referenced total CPI inflation excluding food and energy, inflation on a 3-month annualized basis rose one full percentage point to 3.2% in May—the first time this indicator has had a 3-handle since late 2023. Finally, the Bank’s former preferred measure of core inflation—CPIX (CPI excluding the 8 most volatile components & indirect taxes)—advanced 1.3 percentage points when calculated the same way, topping 2% for the first time since the end of last year.
Despite the unexpected uptick in total inflation in May, it has remained within the Bank of Canada’s 1% to 3% target range for five consecutive months—the first time that’s happened since the disinflationary days early in the COVID-19 pandemic. At 2.8% y/y, headline inflation in April and May averaged below the Bank’s forecast of 2.9% for Q2 in the April 2024 Monetary Policy Report. Most measures of underlying inflation remain below 3% as well and have been for a few months. At the same time, real GDP growth is tracking roughly in line with the Bank’s most recent forecast to start 2024 (see our latest Economic and Financial Outlook External link. for more information). And on a per capita basis, economic activity looks even worse. Taken together, we continue to expect a rate cut at the Bank of Canada’s upcoming July interest rate announcement. That said, the May price data puts more weight on the upcoming employment and inflation releases.