Canadian Inflation Slowing, But Not Enough To Prevent Rate Hike: BMO

Canadian inflation is showing some encouraging signs, but the devil’s in the details. Statistics Canada (Stat Can) reported the growth rate for the Consumer Price Index (CPI) saw annual growth fall much lower than the market had forecast for May. BMO saw that as encouraging, but warns short-term growth isn’t budging, and that will reinforce the need for another rate hike in the coming weeks. 

Canadian Inflation Came In Much Lower Than Expected

Canadian inflation showed some encouraging signs, following one of the sharpest rate moves in history. Headline CPI came in at 3.4% in May, lower than the 4.0% expected by the market. It was also the lowest annual growth rate in the past two years. 

“Unfortunately, the short-term core metrics weren’t quite as encouraging,” warned Benjamin Reitzes, Canadian rates & macro strategist at BMO. 

The 3-month annualized rate for CPI trim came in at 3.8%, while CPI median remained flat at 3.6% in May. This implies the short-term moves are more rapid than the average over the past year. If it persists, a reacceleration of 12-month growth can occur.  

Not Enough To Stop Interest Rates From Rising Further

The short-term stubbornness is exactly what the Bank of Canada (BoC) didn’t want to see. “The Bank of Canada’s June policy statement highlighted that it wasn’t comfortable with those short-term measures holding in the 3.5%-to-4% range,” said Reitzes. 

“While there was some good news in the May inflation report, it likely wasn’t enough to keep the BoC from hiking another 25 bps in July, assuming the rest of the data over the next two weeks holds up.”

An important point worth considering is this might indicate tempering expectations. Earlier this month, the market was anticipating a little over one full hike by year end. At this moment, it sounds like the July hike may just squeeze by. It’s a gamble for the central bank, since raising rates too slowly won’t taper demand. Prices tend to just absorb the higher costs if the market has time to adjust. 



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  • Ravi 10 months ago

    LOL. Your guys articles are always fear based.

    • Dan 10 months ago

      I agree, but they are often right. The ‘other side’ is optimistic on house prices because of supply/demand (decent arguments). These guys paint a picture about the terrible economic factors that enable that demand. So far, both have been right and have good arguments. If prices/economic conditions eliminate enough demand (ability or willingness to purchase a house) then it’s downward pressure on demand. Not falling prices or falling demand, just downward pressure.

  • Ike 10 months ago

    I just feel really bad for those with million+ dollar mortgages in Toronto whose property taxes might starting rivalling their mortgage payments soon.

    • Nana K 10 months ago

      Property taxes are ridiculously low in Toronto. Let homeowners fund some of the city services they enjoy.

    • Rob Sue 10 months ago

      Stupid is as stupid does. If you bet that things keep going up than you made a good bet. But if things go down you made a bet not based on past reality and things are going to be different this time, read them and weep, based on the presumptions.

  • Andrew Baldwin 10 months ago

    “Prices of products manufactured in Canada, as measured by the Industrial Product Price Index (IPPI), fell 1.0% month over month in May and were 6.3% lower than May 2022. In May 2023, prices of raw materials purchased by manufacturers operating in Canada, as measured by the Raw Materials Price Index (RMPI), decreased 4.9% on a monthly basis and fell 18.4% year over year.” These are leading indicators of consumer price inflation and indicate that inflation will likely continue to fall. Also, the exit effect, which for some reason best know to itself, StatCan chooses to call a base year effect, that pushed down the inflation rate for May 2023 will do the same for June 2023. The May 2022 monthly inflation rate was 1.4%. The June 2022 monthly inflation rate is half that at 0.7%, but still strong enough to virtually guarantee another drop in the annual inflation rate in June.
    Core CPI inflation in general is a lagged indicator of All-items CPI inflation. The measures included in the new operational guide are particularly useless, since none of them exclude mortgage interest cost. Reitzes cheats by only looking at CPI-trim and CPI-median. CPI-common went up by 5.2% in May 2023! The average of the three measures was 4.5%. This compares with 3.7% for CPIX, the old operational guide, which does exclude mortgage interest cost. Reitzes should really stop looking at our operational guide at all, until we once again have one that is insensitive to mortgage rate changes. In any case, the bottom line is that core CPI inflation is better than our dysfunctional operational guide suggests, and does not support a hike in the overnight rate in July.

  • Frank 10 months ago

    CPI , 3.4. Strip away mortgage interest, CPI is at 2.5. BOC are criminals, they have said 2% target, in verbatim it’s 2-3%. Not enough ppl have lost their homes which obviously is the goal so the cronies at the helm friends with deep pockets can swoop in for fire sales. Shame on the BOC, the government shame on reckless spending, adding a second carbon tax causing inflation to remain high as farmers need fuel and so do the trucks that deliver it, downloaded to the consumer. And don’t forget about summer driving season. Pathetic .

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