Highlights:
- Headline inflation rate held at 2.2% in May, lower than market expectations
- Energy prices surged 11.6% on back of 23% jump in gasoline prices
- Ex-energy, inflation rate stood at 1.6%, down from 1.9% in April
- The Bank of Canada’s core measures, averaged 1.9%
Our Take:
Canada’s headline inflation rate levelled out at 2.2% in May as a sharp jump in gasoline prices was largely offset by falling prices for telephone services, traveler accommodation and computers. This defied expectations that the headline rate would hit 2.6%. The bank’s core inflation measures averaged 1.9% slipping below April’s 2% print. The data, while lower, than market expectations, was largely in line with the bank’s forecast for a 2.3% average rate in Q2 with the core measures holding close to 2%.
Today’s report confirms that inflation is tracking the bank’s forecast but undoubtedly the focus for policymakers has shifted toward the growing threat to the economy from the strained relations with the US. Mutterings about levying import tariffs on motor vehicles combined with the discouraging headlines regarding NAFTA have dampened market expectations that the bank will raise the overnight rate in July. Economic reports have also weighed on rate hike expectations with a softening in manufacturing activity and retail sales teeing up for a flat reading on April GDP. But this slower-than-trend increase follows two very solid gains in February and March and is still consistent with the economy growing at an above potential pace in the second quarter. With limited spare capacity, this will likely be enough for the data-dependent central bank to follow through and hike the overnight rate next month though recent developments have made it a closer call. Further rate increases however will be slow to materialize as the bank factors in the impact of heightened uncertainty on the outlook for trade and investment.
