Despite the rumors, Canadian inflation is alive and doing well—even with rising unemployment. Statistics Canada (Stat Can) released its latest update to the Consumer Price Index (CPI), showing an unexpected and large jump in May. It was the first surprise reading of the year, and not what the central bank wanted to hear. This move lowers the odds of a rate cut at the next meeting even further.
Canadian Inflation Climbs To 2.9%, Surprising The Market
Canadian headline inflation moved in the wrong direction last month. Consumer prices climbed 0.6% in May, significantly above expectations. This helped push CPI annual growth 0.2 points higher to 2.9%, on the edge of the central bank’s target range. It was the first surprise reading of the year for CPI.
Canadian Inflation Gets An Upward Surprise From Service
Annual growth rate for Canadian CPI and CPI Services.
Source: Stat Can.
Headline data wasn’t the only metric moving in the wrong direction in this report. The Bank of Canada (BoC) prefers the less-volatile Core CPI, which minimizes noise from outlying moves. Core CPI advanced 0.3% in May, driving annual growth for the median and trim measures to 2.8% and 2.9%, respectively. It’s easy to dismiss the headline, but Core measures also show rising inflation. That’s bad news for those expecting a rate cut, but first—where is the inflation coming from?
Canadian Inflation Driven By Services, Travel & Cell Phones Lead
Last month’s surprise growth was attributed to service price inflation. Annual growth for the segment accelerated 0.4 points to 4.6% in May. The agency attributes the move to cell phone service, travel tours, rent, and air transportation. Those must be some hefty mobile phone bills to move the index.
Rising Inflation Makes A July Rate Cut More Unlikely
Most inflation observers just want to know how this impacts the next BoC rate decision. The reaction was mixed from experts, who expect rate cuts at some point. They just think a cut at the next meeting isn’t very likely as of right now.
Another CPI report is expected before the next BoC rate decision, which will be key says RBC. “The BoC is highly data dependent, and the upside surprise in May CPI growth will put more focus on the June CPI numbers to be released ahead of the next policy rate decision in July,” explained Nathan Janzen, assistant chief economist at RBC.
He believes the weakness of the economy will play a large role in the central bank’s decision. “…softening per-capita GDP and rising unemployment also increase the odds that price growth will continue to broadly slow,” he said.
One report doesn’t make a trend, and that’s still true even if the damage is reversed in the next report. That was the takeaway from BMO, which sees the central bank looking for clarity before making its next decision.
“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,” said Douglas Porter, chief economist at BMO.
Adding, “However, it doesn’t rule out such a move, as we will see one more CPI. With inflation back on a bumpy path, the outlook for BoC moves is similarly bumpy. For now, our official call remains that the next BoC rate cut will be in September, and this report does nothing to move that needle.”
