In this week’s The Seven…

• Temporary? - Inflation in May
• Economic architect - Alan Greenspan has passed away
• Ready to deliver - Large kitchen and food distribution centre opens
• Back of the pack - Canada’s economic growth lags its peers
• Heading North - Ottawa looks to streamline three projects
• Interesting Fact - Foreign control in the Canadian economy
• Chart of the Week - The oil price rollercoaster

The price of oil was a key theme this week.

First, the inflation report for May confirmed what consumers have been experiencing: higher gas prices pushed the headline inflation rate in Canada up to 3.2%. That hurts. But the pain could get a lot worse if higher energy prices and their spillover effects stick around for an extended period. If that happens, the Bank of Canada might raise interest rates. Ouch, indeed.

Second, an interim peace deal between the U.S. and Iran, and the movement of more ships through the Strait of Hormuz, have pushed the price of oil down. If this persists, the inflationary spike could prove to be—to borrow a word that didn’t work out so well when inflation was on the rise coming out of the pandemic—“transitory.”

In addition to having some fun in the sun this summer, the team here at ATB Economics will continue to keep on top of inflation and the situation in the Middle East. While inflation risks have eased in the wake of the peace deal, our view is that oil prices and inflation will remain higher than before the conflict began. As such, we continue to expect the Bank of Canada to remain on hold this year as it walks the tightrope between elevated inflation and tepid economic growth.

Speaking of ups and downs, the loonie has been on a downward trend this week vis-à-vis the U.S. greenback. The loonie has fallen to its lowest levels so far this year at just a bit above 70 U.S. cents compared to over 74 cents in January. The slide reflects strong demand for U.S. dollars (in part due to signals from the Fed that higher U.S. interest rates might be on the way), falling oil prices, and a weak Canadian economy. Hopefully, the GDP reading for April that comes out next week will show that the national economy was off to a better start in the second quarter than what we saw in the previous two.

A weaker loonie cuts both ways. It adds to inflation and input costs as imports from the U.S. become more expensive. At the same time, it provides an incentive for U.S. tourists to come to Canada and gives the export sector a lift.

Tech stocks, meanwhile, had a wobbly week—a useful reminder that there are a lot of questions surrounding the AI juggernaut. The key question is whether AI can deliver its promised productivity gains and do so without sending unemployment through the roof. More things to keep ATB Economics busy this summer!

Consumers feel the pinch in May

The latest increase in inflation is not welcome news for consumers worried about the cost of living and still trying to catch up to the previous period of high inflation.

As we reported on Monday, Canada’s inflation rate jumped to its highest level since December 2023, rising above the upper end of the target range to hit 3.2% in May.

Even if it is short-lived, the stress on consumers is real. And while the spillover effects of higher energy and fertilizer costs have not yet had a major impact on inflation, they are in play and could get worse before they get better. As ATB Cormark Capital Markets analyst Chris Murray recently noted, Canadian airlines continue to apply fuel-related surcharges because jet fuel costs remain elevated compared to last year despite a recent decline in oil prices.

The bottom line here is that the elevated inflation rates we thought were behind us at the start of the year are back with us for now and are adding to cumulative price growth that has been dogging households and businesses in Canada for going on five years (see the graph below). The good news is that the recent rise in the inflation rate is mostly due to higher oil prices rather than passthrough effects and the recent drop in oil prices suggests that June's inflation reading will come in lower.

Economic architect: Alan Greenspan (1926-2026)

Alan Greenspan, the influential economist who steered the United States economy through five presidential administrations, has passed away. As Chair of the U.S. Federal Reserve from 1987 to 2006, Greenspan was arguably, as per the New York Times, the “pre-eminent economic policymaker of his time,” leaving an indelible mark on global finance.

Dubbed the "maestro," Greenspan championed a period of price stability and economic expansion. He famously navigated the 1987 "Black Monday" stock market crash just weeks into his tenure, helping to prevent a broader economic collapse. His deft handling of the 1990s technology boom cemented his reputation, as he leveraged productivity gains to keep interest rates low, fostering historic job growth and low inflation.

However, his faith in deregulation and market self-correction later drew scrutiny. Critics pointed to his ultra-low interest rate policy following the 2001 recession as a catalyst for the housing bubble, a critique Greenspan himself partially conceded to in later years.

Whether viewed as the guardian of prosperity or a symbol of regulatory laissez-faire, Greenspan shaped decades of monetary policy in the U.S. His legacy remains a cornerstone of contemporary economic debate regarding the balance between free markets and policy intervention.