Pedestrians pass by fresh fruit laid out at Wellesley Fruit Market in downtown Toronto on June 20.Sammy Kogan/The Globe and Mail
Canada’s inflation rate unexpectedly climbed higher in May on a flare-up in services prices, weakening the case for the Bank of Canada to cut interest rates again in July.
The Consumer Price Index rose at an annual rate of 2.9 per cent in May, quickening from 2.7 per cent in April, Statistics Canada said on Tuesday. Financial analysts had been expecting the inflation rate to ease to 2.6 per cent. On a month-over-month basis, consumer prices rose 0.6 per cent, mostly stemming from a sharp uptick for travel tours, Statscan said.
This was the first time in 2024 that inflation came in higher than Bay Street estimates, with a variety of services – including plane tickets, rents and cellphone plans – contributing to the upturn. Furthermore, core measures of inflation that strip out volatile price movements also picked up speed.
Tuesday’s report casts some doubt over the timing of interest-rate cuts. Earlier this month, the Bank of Canada trimmed its benchmark lending rate to 4.75 per cent from 5 per cent – the first reduction in four years – to kick-start the process of easing monetary policy.
Bank of Canada governor Tiff Macklem has indicated that further rate cuts could be gradual and will hinge on incoming data, including more progress in bringing inflation to heel.
Traders are dialling back their bets of a repeat performance next month. Shortly after the CPI report was published, money markets were pricing in a 34-per-cent chance of a rate cut on July 24, down from roughly 60 per cent before the release, according to Bloomberg data.
Still, the central bank will have a slew of economic data to consider over the next month, including another report on inflation, so the door to a July cut isn’t closed.
“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,” Doug Porter, chief economist at Bank of Montreal, said in a client note. “With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy.”
The services side of the economy is showing plenty of inflationary pressure. Services prices rose 4.6 per cent in May, year-over-year, up from April’s 4.2-per-cent pace. There were sizable increases in the travel industry. Prices for travel tours and air transportation rose by 6.9 per cent and 4.5 per cent, respectively, on an annual basis.
The housing sector offers a persistent risk to the inflation outlook. Rents rose 8.9 per cent in May, year-over-year, up from 8.2 per cent in April. This was the largest increase Statscan has observed since changing its rent methodology in 2019.
“A higher interest rate environment and population increases both continue to put upward pressure on the rent index nationally,” the agency said in the report.
Food was another source of price pressure. Over the past year, grocery prices have risen 1.5 per cent, up from 1.4 per cent in April – the first acceleration since mid-2023. On a monthly basis, prices rose 1.1 per cent, which was the largest increase since January, 2023. Prices for groceries have risen by 22.5 per cent since May, 2020.
The Bank of Canada’s preferred measures of core inflation rose to an average annual rate of 2.85 per cent in May from 2.7 per cent in April, halting four consecutive months of decline. Likewise, other measures of core inflation also rose at faster rates last month.
In its most recent Monetary Policy Report, published in April, the Bank of Canada forecast average headline inflation of 2.9 per cent in the second quarter, meaning CPI is evolving in line with what the central bank projected. “We know there can be some bumps along the way,” Mr. Macklem said this month at a news conference.
The BoC expects inflation to drop below 2.5 per cent in the second half of 2024, then reach its 2-per-cent target next year. The central bank will update its economic projections at the next rate decision on July 24.
Several economists said Tuesday that a July rate cut was still a possibility, given the number of reports being published over the next month.
“The past few months had seen price pressures cooling more than expected, so today’s release might simply represent some give back,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a client note. “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.”
Matt Lundy