Summary

Today’s inflation report was not as cheery as the last two. The good news: inflation held below 3% in May, both on the core and headline measures. The bad news: inflation (headline and core) accelerated.

We are reminded today that the inflation road is bumpy and declaring victory will take time.

In the Bank of Canada’s deliberations released last week, it reinforced its data-dependent approach to setting interest rates with a razor focus on the inflation readings. One month doesn’t make a trend, but we think it will keep the Bank cautious, reducing the odds of a July cut. We do get one more CPI report before the July 24 decision, which could change things. But with this less-than-stellar report in hand, we are sticking to our official call for a September cut instead.

The headline number

The overall inflation rate in Canada rose to 2.9% on a year-over-year (y/y) basis in May, up from 2.7% in April and exceeding expectations (Bloomberg average) of 2.6%. The culprits for the uptick? Cost of services, namely cellular services, travel tours, rent and air transportation.

Core inflation

Headline inflation bounces around, driven by volatile items like energy. The core inflation measures are intended to cut through that volatility by looking at the trend.

Lately the trend has been the Bank’s friend. Not as much in May. The median measure rose by 0.2 percentage points to 2.8% y/y while the trim measure edged up a tenth of a point to 2.9% y/y. These are still below 3%, which is progress, but this is the first time this year that the annual readings have not declined. Moreover, the three-month measures accelerated to the mid 2s.*

*The month-over-month change in the three-month moving average, calculated at an annualized rate.

Digging Deeper

Shelter costs remain the key inflation driver, driven by rents and mortgage interest costs. Excluding shelter, annual inflation was only 1.5% y/y last month. Mortgage interest costs are still a big part of the increase, up 23.3% y/y, but its effect is diminishing with time.

Grocery prices are still very high, but not the same driver as in the past. They grew by 1.5% y/y, up slightly from April.

Energy costs fell last month, and rose at a slower annual rate of 4.1% on a smaller increase in gasoline prices.

In Alberta

Alberta’s annual inflation rate held steady at 3% y/y in May. Energy prices rose at a slower rate (3.2% y/y), aided by declines in electricity prices.

As we’ve highlighted, electricity prices should continue to subtract from inflation over the summer, as they have fallen below prior year levels with new generation capacity coming online. Further, policy measures (rate caps and rebates) lowered electricity prices in early 2023 (the base period), but were no longer in effect after April 2023.

Gasoline prices (+8.4% y/y) continued to put pressure on inflation in May, but not as much as April. The key driver of Alberta inflation is shelter costs, up 8% y/y last month and driven by a 15.7% y/y increase in rents. Excluding energy and food prices, Alberta’s core inflation rate was 3% (vs. 2.9% nationally).

Answer to the previous trivia question: The only team to successfully come back from a 3-0 deficit to win the Stanley Cup was the Maple Leafs in 1942.

Today’s trivia question: When it comes to money, what does M1 refer to?