Inflation rate rises in May | Not what the Bank of Canada wanted

This is not what the Bank of Canada wanted to see. The jump in inflation observed in May in the country risks making the central bank think about a month before its next meeting – where it will decide whether to lower its key rate again.

The prices of cell phone plans, organized trips, airline ticket prices and rent pushed the consumer price index (CPI) to 2.9% in May, Statistics Canada said on Tuesday. This is higher than the 2.7% price increase seen in April.

This is the first time in 2024 that inflation has exceeded economists’ expectations. They anticipated price growth of 2.6% in May.

“There is no doubt that this is not what the Bank of Canada wanted to see,” said Douglas Porter, chief economist at BMO, in an analytical note. This clearly reduces the chances of a further rate cut [le 24] July. »

The Desjardins Movement is more nuanced. Despite the increase observed last May, inflation remained within the Bank of Canada’s target range of 1% to 3% for a fifth consecutive month, notes the cooperative financial group.

If its economist Randall Bartlett expects a second consecutive cut in the key rate in a month, he warns that the coming weeks will be decisive.

“The next figures on employment and inflation will be of greater importance,” he underlines in a report.

Between now and the next meeting of the Bank of Canada, economists will have their eyes glued to the next data on inflation, Statistics Canada’s portrait of gross domestic product (April) as well as the portrait of unemployment from federal agency.

Uncertainty

Despite everything, the most recent indicators from Statistics Canada sow doubt among a growing number of observers as to when we could see a further reduction in the key rate – an announcement awaited, in particular, by holders of mortgage loans at floating rate.

By increasing its base rate to 4.5% on June 5 – a reduction of 25 basis points – the Bank of Canada signaled that further reductions were to come. Playing cautiously, its governor, Tiff Macklem, had however not opened his game on the possibility of further relaxation from July 24.

“We make our decisions on rates one at a time,” he repeated.

Since then, the summary of the deliberations of the board of the institution had revealed that Mr. Macklem and his deputies were juggling the possibility of waiting until July to lower interest rates. The latter particularly feared a stagnation of progress in curbing inflation.

Even if we should not see a trend taking hold despite the disappointing data for the month of May, TD Bank senior economist James Orlando nevertheless believes that the Statistics Canada report demonstrates the difficulty in reconnecting with the inflationary target by 2%.

“For this reason, we believe that the Bank of Canada will opt for a pause in July before reducing rates again in September,” he believes.

Rebound at the grocery store

Overall, the increase in prices for services increased by 4.6% in May after the 4.2% increase the previous month, notes Statistics Canada.

At the grocery store, food prices began to grow more quickly year over year in May (1.5%) after slowing down in April. This monthly growth is mainly attributable to the price of fresh vegetables, meat and fresh fruit, according to the statistical agency.

This category has weighed heavily on household spending since the arrival of COVID-19, according to Statistics Canada: since 2020, the price of food has jumped by approximately 22.5%.

“This is a significant headwind for households which risks continuing to fuel bargain hunting behavior,” believes Irene Nattel of RBC Capital Markets.

In Quebec, inflation increased from 3% in April to 3.1% in May.