By Robb M. Stewart
OTTAWA--Inflation in Canada cooled sharply in May to its slowest pace since mid-2021, though food prices remain elevated and measures of core inflation tracked by the central bank may be proving too sticky for the central bank to take much comfort that price pressures have eased sharply enough in response to more than a year of higher interest rates.
Canada's consumer price index rose 3.4% in May from a year earlier, Statistics Canada said Tuesday. The result was in line with market expectations and 1 percentage point lower than in April, when inflation unexpectedly accelerated.
Month-over-month, CPI was up 0.4% in May, matching the consensus expectation following a 0.7% gain in April. On a seasonally adjusted basis, inflation edged up 0.1% on-month.
Annual inflation has eased steadily since peaking at 8.1% last June, and the Bank of Canada's most recent forecast anticipates it will cool to about 3% this summer as lower energy prices feed through and last year's large gains fall out of the yearly data. Still, bank officials have recently pointed to heightened risk inflation could get stuck above the Bank of Canada's 2% target.
The central bank earlier this month raised its policy rate one-quarter percentage point to a 22-year high of 4.75%, ending a short-lived pause on interest rates following surprisingly strong and broad-based consumption growth in the first quarter of the year and April's acceleration in inflation. Bank of Canada officials will meet to decide on rates July 12, then again after the summer in early September.
May's retreat in headline inflation comes as the labor market also showed signs of loosening in May, with the jobless rate edging up after holding steady near a record low for months, but as the housing market stages a recovery. Easing inflation in recent months is in large part due to the base effects of comparisons with early last year, when the global economy was affected by Russia's invasion of Ukraine and commodity prices jumped.
Two measures of core inflation the Bank of Canada closely monitors, weighted median and trimmed mean, cooled in May to an average 3.9% from 4.3% the month before, Statistics Canada said. The measures on a three-month basis also continued to ease but remain above 4%, while on an annualized basis the metric only ticked down to 3.7% from 3.8%.
"Every inflation metric remains far above the 2% inflation target," said Benjamin Reitzes, managing director of Canadian rates at BMO Economics. "The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next two weeks, a hike still looks likely."
Jay Zhao-Murray, a foreign exchange analyst at Monex Canada, said the breadth of inflation has fallen, with around half of the components in the CPI basket running above target in May compared to roughly three-quarters when averaged over the past three months, which could be an early sign of cooling price pressures after months of re-acceleration.
"But the fact remains that the monthly pace of price increases was still twice as strong as it would be if inflation were back to normal and the underlying core measures remain too high for comfort," Zhao-Murray said, adding a rate increase in July still is likely though the risk is reduced that Bank of Canada will take its policy rate above 5%.
In its report, Statistics Canada said that energy prices were down sharply in May from a year earlier, when supply uncertainty was high because of the war in Ukraine. Gasoline prices dropped more than 18% from the same month last year, and on a monthly basis were down 0.8% after increasing more than 6% in April.
Still, grocery prices rose at more than double the rate of annual headline inflation and were little changed from the month before, driven by prices for edible fats and oils, bakery products and cereal products. And prices for food at restaurants rose at a slightly faster pace year-over-year in May amid labor shortages and higher input costs and expenses, the data agency said.
Excluding volatile food and energy prices, Canada's CPI was up 4.0% in May from a year earlier, and 0.4% higher month-on-month.
The agency noted than interest on mortgages rose at the fastest pace on record, climbing almost 30% on-year for a third consecutive monthly increase as Canadians continued to renew and initiate home loans at higher interest rates.
Prices for durable goods grew at a slower pace year-over-year, with furniture prices falling and passenger vehicles prices logging the smallest increase since February 2021. Canadians also paid less for cellular services in May due to lower-priced cellular data plans, the agency said.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
06-27-23 1121ET
