Highlights:
- The year-over-year rate of headline CPI inflation fell to a six-month low of 1.3% in May.
- Expectations were for a modest decline to 1.5% from April’s 1.6% reading.
- Electricity prices fell in May as another round of rebates began rolling out in Ontario.
- Gasoline prices declined in the month with the year-over-year increase slipping to 6.8% from as high as 23% in February.
- Food prices rose in May and are now almost flat relative to a year ago following a period of deflation.
- Year-over-year inflation excluding food and energy prices fell for a fourth consecutive month, hitting three-year low of 1.4% in May.
- The BoC’s three core measures averaged 1.3% after rounding, down from 1.4% in April and 2.0% a year ago. May’s average is the lowest since 1999.
Our Take:
Today’s CPI report is the first since the Bank of Canada’s hawkish turn last week. Senior Deputy Governor Wilkins’s comments put a positive slant on recent economic developments. Additionally, she was somewhat dismissive of recent softer inflation numbers, noting both the transitory impact of lower food prices and the lagged effect of excess capacity on core measures. Nonetheless, another broad-based shortfall in inflation in May will likely have markets re-evaluate the odds of a rate hike as soon as July. Broadening economic growth and progress in the energy sector’s adjustment, along with the central bank’s acknowledgement that inflation lags the cycle, seem to make rising inflation in the near term less of a precondition for removing accommodation. However, we still think policymakers will want to see some progress toward 2% before raising rates and that was clearly absent in May. Next week’s Business Outlook Survey, GDP report and comments from Governing Council members will help firm up expectations around July’s policy meeting but we think prospects of a move next month have been dealt a blow today.
