Consumer price inflation heated up in May, rising to 7.7% year-on-year (y/y), up from 6.8% in April. That was the fastest pace since January 1983, and higher than forecasters, including ourselves, were expecting.
Gasoline prices were a key driver, with prices at the pump up 12% month/month, and 48% y/y. For energy prices as a whole, May saw the biggest one-month increase since 2003.
Food price pressures were steady, up an elevated 8.8% y/y in May. Costs at grocery stores were up even further, up 9.7% y/y. Statistics Canada cited that Canadians report being the most affected by rising food prices.
Shelter inflation also remained steady, up a rapid 7.4% y/y, matching April’s pace. Homeowners’ replacement cost rose to a lesser extent in May (+11.1% y/y), as prices for new homes showed signs of cooling.
Services prices as a whole were up 5.2% y/y in May, a step up from 4.6% in April. Not surprisingly as Canadians start travelling again, inflation surged from traveller accommodation (+40.2% y/y).
Seasonally adjusted, month-on-month prices were up 1.1% following a 0.7% gain in April. That is the fastest increase since the introduction of the series in 1992, with the acceleration largely driven by energy prices. All items excluding food and energy were up 0.6% m/m in May, matching April’s pace.
Statistics Canada started including used vehicle prices in the CPI for the first time in May, which rose 2.2%, but did not impact the headline tally. Statcan said headline CPI would have been the same without the introduction of used vehicle prices.
All three of the Bank of Canada’s core inflation metrics edged higher in May. CPI-trim rose 0.2 percentage points (pp) to 5.4%, CPI-common by 0.4 pp to 3.9%, and CPI-median by 0.3 pp to 4.9%.
Key Implications
A generation of Canadians is experiencing high inflation for the first time. If you aren’t over 40, you have never lived through inflation like this, and unfortunately, we are not expecting much of a reprieve going forward. Inflation is expected to remain elevated through 2022 as outlined in our recent forecast. On the shelter side, we are likely to see a continuation of rent price increases alongside rising mortgage interest costs. This will be balanced against the impact of declining house prices.
All of this re-enforces the view that the Bank of Canada will hike by 75 basis points (bps) on July 13th, following in the Fed’s footsteps.
