Consumer price inflation cooled to 3.4% year-on-year (y/y) in May, down from 4.4% in April – right in line with market expectations. That marks the slowest pace of inflation in nearly two years.
Prices at the pump were the main story. Favourable base year effects leave gasoline prices down 18.3% lower than a year ago, an even sharper decline than -7.7% in April. Excluding gasoline, the CPI rose 4.4% in May, following a 4.9% increase in April.
Inflation at the grocery store remained firm, with prices up 9% y/y in May.
Shelter inflation eased slightly to 4.7%, down from 4.9% in April. Mortgage interest cost inflation keeps rising, up 29.9% versus a year ago in May. Statistics Canada cited that it is the largest single contributor to the year-on-year pace of inflation. Excluding higher mortgage costs, inflation would have been 2.5% y/y in May.
There were signs of easing price pressures for consumer goods. Clothing and footwear inflation was 0.7% y/y in May, down from 2.5% y/y in April and furniture prices were down 2.9% y/y, the smallest increase in three years. Overall durable goods inflation cooled to 1.0% y/y in May from 2.2% in April.
Services inflation cooled from 4.8% y/y in April to 4.6% y/y. Our measures of “supercore” inflation – a measure of core services inflation – remained elevated at 5.5% y/y, from 5.7% in April thanks to a sizeable increase in travel services prices.
The Bank of Canada’s underlying inflation pressures cooled below the 4% mark in May. CPI-trim eased to 3.8% y/y versus 4.2% in April and CPI-median at 3.9% versus 4.3% y/y in April. Looking at the recent monthly trends, CPI- trim on a three-month annualized basis was at 3.8%, down from 3.9% and median at 3.6%, down from 3.8% in April.
Key Implications
Canadian inflation continued to cool in May, but progress is unlikely to be enough to prevent the Bank of Canada from raising rates in July. Improvements in core inflation are slow, particularly on the services side, with inflation picking up in discretionary areas like travel services and restaurant meals (6.8% y/y in May). Cooler goods inflation is welcome, but the BoC has likely been counting on that already as supply chain snarls improve.
Looking at the Bank’s core measures, Governor Macklem may have a Bon Jovi earworm, humming, “whoa, we’re half way there…”. But, there is still a ways to go to get inflation all the way back to 2%. And the bank would rather not be “livin’ on a prayer”, and is likely to take rates another quarter point higher in July to ensure demand, and hence price pressures cool further.
. Cooler goods inflation is welcome, but the BoC has likely been counting on that already as supply chain snarls improve.){kind=link}