Canadian Inflation Higher Than Expected, Odds Of A Rate Cut Fall

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.” 

8 Comments

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  • Reply
    Rajnish Singla 3 days ago

    Bank of Canada needs to do the right thing and continue to drop rates quickly to support the economy and support homeowners.
    A high rate is not needed. Inflation is not an issue the issue is house prices must be supported.

  • Reply
    Nazrul 3 days ago

    I found no items in Canada specially Grocery items got cheaper than last 6 six months. On the other hand, there are few items getting higher price in every week’s or every other weeks. How can we say inflation reduced comparing last one to two years??? All these are forgery by the Government office to show less inflation. Am I wrong?? If you can show me wrong in anyway you are most welcome to show me. I can show you several items if anyone wants or wants to challenge me.

    • Reply
      Itchy Bear 1 day ago

      Inflation falling just means the price goes up more slowly.

      Prices falling is deflation, and that causes the economy to grind to a halt. Why buy anything today when it will be cheaper tomorrow?

  • Reply
    JJ 2 days ago

    Don’t worry – the BoC is going to let the CAD freefall and ignore inflation so that they can lower interest rates back to 0% to bail out the speculators!
    Instead, lobby your policiticians: leave interest rates where they are – Canada needs to #lethomepricesfall !

    • Reply
      Fraser 2 days ago

      they need to crash asap

    • Reply
      Abe Heuchert 2 days ago

      Asset prices falling will cause civil unrest throughout Canada like we have never seen before. A recent RCMP report which is not talked about here but mentioned by by Andrew Henderson of Nomad Capitalist in a recent podcast focusing on Canada is really scary. The Federal Government suppresses anything negatively affecting them as the next federal election approaches. Canadian culture is not what it used to be because of the immigration and refugee mix that has brought us many people who fled violent and poor conditions but many of these people are not afraid to fight back and use violence if need be in an uprising of sorts. That time may be near or already here as people living here in Canada have never faced poverty and inequality as exists today. And it has been brought about by mismanagement of our economy and our immigration system by unqualified Neo-Socialist-Communist policies that have failed elsewhere and brought down governments and destroyed countries such as Cuba, the Soviet Union, many parts of Eastern Europe, Argentina, Cambodia, Venezuela, El Salvador – just to name a few.

  • Reply
    Fabian 18 hours ago

    It’s funny because a large portion of the CPI is cost of shelter which is directly caused by high interest rates. In may CPI excluding shelter was only 1.5%.
    https://www150.statcan.gc.ca/t1/tbl1/en/tv.action?pid=1810000413&pickMembers%5B0%5D=1.2&cubeTimeFrame.startMonth=05&cubeTimeFrame.startYear=2024&referencePeriods=20240501%2C20240501

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