Canada’s inflation rate jumped to its highest level since December 2023.

The consumer price index rose 3.2% in May over the same month last year, driven by higher energy costs.

Gasoline prices surged 33.2% year-over-year (y/y). But it wasn’t just prices at the pumps, as airline companies increased their prices in response to the war in Iran and the Strait of Hormuz closure. Air transportation costs were up 7.4% y/y.

Other inflation culprits included food (+3.8% y/y), with the prices of fresh fruit accelerating. Food has been one of the more stubborn components of the CPI basket - consistently up 3%+ y/y since last July.

If there is good news, it's that shelter costs are rising at a slower rate (+1.7% y/y). Mortgage interest costs are now flat over last year, replacement costs are down and rental inflation continues to cool off.

The Bank of Canada looks at core metrics, which strip out  the impacts of volatile components to gauge underlying inflation trends. The good news here is that, so far and broadly speaking, those metrics seem to be cooperating.  

• Both the median (2.1% y/y) and trim (2.0% y/y) core measures held at their lowest levels since the pandemic.
• The old-fashioned core metric - CPI excluding food and energy - rose at a moderate rate of 1.6% y/y.

In Alberta, the annual inflation rate rose to 3.7%, its highest level since February 2024. Energy prices were the main driver, as in the rest of Canada. While gasoline prices rose at a similar rate as the rest of the country, transportation costs increased faster in Alberta, driven primarily by a jump in vehicle insurance premiums (+26% y/y). Other items that rose faster in Alberta than the rest of the country include recreation, home and mortgage insurance premiums, and clothing and footwear.  

Implications for the Bank of Canada

The Bank was expecting inflation to pick up steam due to the war in Iran. But these readings are even higher than they forecast in April. Their April Monetary Policy Report pegged headline inflation at only 2.4% in May.

The Bank said they will look through a temporary spike, but not a persistent one. Or in the words of the Bank at the last rate decision: “Governing Council is continuing to look through the war’s near-term impact on headline inflation, but will not let higher energy prices become persistent inflation.” The silver lining is that core readings suggest that the energy price spike is not yet generalized across goods and services. For June, we are likely to see a pullback in the inflation rate due to the recent drop in oil and gasoline prices, but it’s unclear how long this will last.

At the same time, the Bank is looking at an economy that they have characterized as “weak,” especially in light of the soft GDP data.

All this points to another “wait and see” hold by the Bank of Canada in July. Inflation is too high to lower rates and the economy is too weak to raise rates. But today’s higher-than-expected inflation print will raise some eyebrows at the Bank and keep the word ‘cut’ out of the conversation.

Answer to the previous trivia question: Births in Canada are the highest during the third quarter of the year (July to September).

Today’s trivia question: When was the first World Cup of football/soccer held?