Consumer prices were up 2.2% year-on-year in Canada in May, unchanged from April and well below market expectations for an acceleration to 2.6%. Adjusted for seasonal patterns, prices rose 0.1% month-on-month.
Steadying the headline rate, energy prices were up 11.6% year-on-year, led by gasoline (+22.9%), but offset by falling electricity prices (-0.8%). Excluding energy, inflation decelerated to 1.6% (from 1.9% previously). Statistics Canada notes decline in telephone service index (down 7.1% year-on-year) as weighing on inflation in the month.
Indeed, outside of energy, price growth was fairly soft across the board. Price growth decelerated (year-on-year) for five of eight major categories. Leading declines on a month-on-month basis (seasonally adjusted) were household operations (-1.0%, seasonally adjusted), and clothing and footwear (-0.2%). The only category to see a significant increase was recreation, education and reading (+1.7%), following a 1.5% decline in April.
The Bank of Canada’s core measures were similarly unexciting. CPI-trim fell to 1.9% (from 2.1% previously), while CPI-median and CPI-common remained unchanged at 1.9%.
Key Implications
This was a soft report. Coming alongside a disappointing retail sales report, the data flow this week suggests little need for urgency from the Bank of Canada to raise interest rates. This is in line with our thinking. We expect just one more hike from the Bank of Canada this year, before it pauses to assess the state of a Canadian economy in the midst of a slowing housing market and ongoing trade uncertainty.
The weaker Canadian dollar, which has fallen to its lowest level in a year, will eventually show up in the inflation report, helping to pull up both core and headline measures. However, this is unlikely to be a game changer for the Bank of Canada, which will look through its impact.
