Canada’s inflation rate accelerated to 2.9% in May, weakening case for BoC rate cut in July

10:30 a.m.

What’s next

The Bank of Canada will have a slew of economic data to consider before its next decision on July 24.

On Friday, Statscan will report gross domestic product for April, along with a preliminary estimate for May. Real GDP was unchanged in March after a strong start to the year.

The next inflation report will be released on July 16, reflecting consumer prices in June.

Economists and investors will also be eyeing U.S. data for any hints of when the Federal Reserve will start to lower interest rates. The Fed’s next rate decision is slated for July 31, although it’s not expected to ease its policy rate that soon.

As of Monday afternoon, money markets were pricing in a 76-per-cent chance that the Fed will start cutting in September, with November considered a certainty, according to Bloomberg data. (These expectations can fluctuate wildly as new data are released; earlier this year, traders were expecting six rate cuts from the Fed in 2024, but now only one or two.)

At an event this month, Mr. Macklem said Canada is “not close” to reaching a limit in how much interest rates can diverge from those of the U.S.

“I would stress, we have our own currency in Canada. We have a flexible exchange rate,” he said. “The flexible exchange rate is the shock absorber and it’s what allows us in Canada to gear monetary policy for what’s needed in Canada.”

– Matt Lundy

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9:50 a.m.

More nail-biting suspense for mortgage shoppers

Today’s worse-than-expected inflation numbers are an unwelcome twist for anyone who needs borrowing costs to come down from the current highs.

A first move by the Bank of Canada earlier this month to lower its trend-setting rate by a quarter of a percentage point has only marginally reduced the financial pressure on those carrying floating-interest debt like variable-rate mortgages and lines of credit. It also appears to have had a modest impact on homebuyer psychology. Predictions that it would reignite activity in the housing market didn’t materialize.

Canadians hoping for lower rates to buy a house or soften the shock from higher mortgage payments at renewal need deeper cuts to feel some meaningful respite. But the latest inflation data casts doubt on whether the central bank will trim rates again at its next meeting on July 24.

To be sure, the faster pace of consumer price increases in May isn’t so stark as to rule out another cut next month. But it suggests inflation’s downward path may be a bumpy one, with the occasional pause or surprise reversal. Rate cuts may also follow a stop-and-go pattern as the Bank of Canada waits for reassurance that price pressures are truly tamed.

For borrowers – and particularly those in the market for a new mortgage – it means financial relief is likely to come as a slow drip.

The flip side is that a slow and uncertain pace of rate cuts may avoid lighting a fire under the housing market. Small gains in terms of lower mortgage rates may be the price to pay for modest increases in property values.

– Erica Alini

9:47 a.m.

How economists are reacting to today’s inflation report

Jules Boudreau, senior economist, Mackenzie Investments

Today’s inflation data shows that Canada’s path to 2 per cent will be a bumpy road, but doesn’t rule out multiple rate cuts in the rest of 2024. … Prices accelerated across the board, with services prices contributing most to the uptick in inflation. Most notably, rents surged in May, rising 10 per cent (annualized) from April, 2024, to May, 2024. While rents are hard to measure precisely from one month to the other, and one data point isn’t a trend, this uptick is a headache for the Bank of Canada. Rent is salient, politically sensitive, and has a massive weight in the consumer basket.

This CPI report is not a death knell for a July rate cut. The bank will see one additional CPI report, and a pivotal jobs report before decision time comes. Over the course of 2024, the balance of risk has clearly turned from inflation to growth. Cutting rates at a steady pace is necessary to jump-start an ailing Canadian economy that is underperforming all its global peers. Zooming out, a sustained bounce in inflation is very unlikely, given the sluggish state of the economy and the disinflationary trend around the world. The Bank of Canada won’t miss the forest for the trees. Multiple rate cuts are still on the table for the rest of 2024.

Douglas Porter, chief economist, BMO Capital Markets

This is the first time in 2024 that Canadian inflation has landed decisively on the high side of consensus, and is clearly a step in the wrong direction. No bones about it, this is not what the Bank of Canada wanted to see at this point, and clearly shaves the odds of a follow-up July rate cut. However, it doesn’t rule out such a move, as we will see one more CPI (next one is July 16, eight days before the July 24 rate decision). With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy. For now, our official call remains that the next BoC rate cut will be in September, and this report does nothing to move that needle.

Olivia Cross, North America economist, Capital Economics

The stronger monthly gains in the Bank of Canada’s preferred core price measures will give the bank some cause for concern after starting its loosening cycle in June. However, with some of that strength due to factors that are likely to be one-offs, and given there is another CPI report before the late July meeting, for now we are sticking with our view that the bank will cut again next month.

The bad news was that CPI-trim and CPI-median each rose by 0.3 per cent m/m and the average monthly gain in April was revised up to 0.2 per cent, a step up from the 0.1 per cent gains seen over the first three months of the year. All that means the three-month annualized rate rose back up to 2.5 per cent. That is a step backward and increases the chance of the bank pausing at its July meeting, but there are several more key data releases before then that could sway the bank’s thinking.

Royce Mendes, managing director and head of macro strategy, Desjardins Securities

The past few months had seen price pressures cooling more than expected, so today’s release might simply represent some give back. Our base case forecast continues to look for another rate cut in July, but upcoming data releases on employment and inflation will take on even more importance to make that a reality. The next Bank of Canada rate decision isn’t until the end of next month, so there’s ample time for the data to turn back.

Click here for a full rundown of what economists are saying.

– Darcy Keith

9:25 a.m.

Increase in food, travel costs push inflation higher

Thought we’d take a vacation from inflation this summer? Uh, no. Travel-related costs are a big reason why inflation kicked higher in a disappointing June report on the cost of living.

The May numbers highlight our two-track economy. Many people are struggling to cope with high interest rates and living costs. Others are spending avidly enough for airlines to feel comfortable jacking up prices by 4.5 per cent on a year-over-year basis and for travel tour operators to increase prices by 6.9 per cent.

Much of the population badly needs a break on inflation and interest rates. But there’s still enough spending power to keep inflation from fading back to near 2 per cent, the level preferred by the Bank of Canada.

The weight on households created by inflation was highlighted in the latest numbers on food costs. Grocery prices rose 1.5 per cent on a year-over-year basis, which is modest. But prices are up 22.5 per cent since May, 2020, and the May rate of food inflation was a bit higher than in April. Statistics Canada said this was the first acceleration in food prices since June, 2023.

Rent is another inflation hot spot – Statistics Canada said the national rent index rose 8.9 per cent in May. That’s a phenomenally large increase when you consider that wage gains are roughly half that level.

If you’re wondering what normal inflation used to look like, we were at 2 per cent in June, 2019. A new normal for inflation is coming and it will be higher than that.

– Rob Carrick

9:14 a.m.

Not what the Bank of Canada wanted to see

It’s not the number the Bank of Canada was hoping to see as it contemplates further interest rate cuts.

The central bank lowered its benchmark rate to 4.75 per cent from 5 per cent earlier this month, and said it expected to deliver more cuts if inflation continued moving lower. The May CPI data doesn’t overturn this narrative. But it does suggest there may not be a smooth path down with interest rate cuts at every rate decision.

Financial markets were pricing a 65-per-cent chance the BoC would cut again on July 24. After the CPI data, the odds had fallen to a coin flip.

While the overall increase in CPI is an unwanted headline, central bankers will be more concerned about the increase in core inflation, which strips out the most volatile price movements, and the uptick in services inflation. The average of the bank’s two preferred measures of core inflation moved to 2.85 per cent from 2.7 per cent – still inside the bank’s target range, but moving in the wrong direction.

After the June 5 rate decision, Governor Tiff Macklem warned that “further progress in bringing down inflation is likely to be uneven and risks remain.” However, his overall tone was dovish. This was reinforced in a speech on Monday that focused on how the labour market is coming into better balance and wage pressures are showing signs of easing.

The latest CPI data may leave bank officials sounding more cautious in the lead-up to the July rate decision, which will also include a new forecast for inflation and economic growth. There’s still time for sentiment to swing back toward a July cut, with one more CPI release to come and a swath of other data, including April GDP numbers out this Friday. But today’s numbers make clear that the bank won’t be on autopilot as it eases monetary policy.

– Mark Rendell

9:10 a.m.

Inflation highlights: Consumers see rent, grocery, travel costs rise

• Rents continue to be an aggravation in personal finances. Statscan said rents climbed 8.9 per cent in May, year over year, up from 8.2 per cent. In Ontario, rent increases quickened to 8.4 per cent from 6.1 per cent. “A higher interest-rate environment and population increases both continue to put upward pressure on the rent index nationally,” the agency said on Tuesday.
• While there’s been some moderation in groceries of late, the narrative may be changing again. Prices for groceries rose 1.5 per cent in May on an annual basis, up from 1.4 per cent in April. This was the first acceleration since June, 2023. On a monthly basis, prices rose 1.1 per cent, following three consecutive declines.
• The average of the Bank of Canada’s core measures of inflation – which strip out volatile aspects of the CPI – rose to 2.85 per cent from 2.7 per cent. Other measures of core inflation also accelerated, offering a setback to central bankers.
• The travel industry played a big role in the inflation flare-up. Prices for travel tours rose 6.9 per cent, year over year, while those for air transportation climbed 4.5 per cent.

– Matt Lundy

9:04 a.m.

Inflation rates by province