EconoFACTS

June 27, 2023 | 09:21

Canadian CPI (May) — Still Hungry for More

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian consumer prices rose 0.4% and 3.4% y/y in May, bang on consensus, with headline inflation slowing a full percentage point from the prior month with base effects providing a bit helping hand (recall that prices surged in May 2022 as commodities jumped after Russia invaded Ukraine). On a seasonally-adjusted basis, CPI rose a mere 0.1%, the smallest increase of the year. Looking ahead to the June figures, the base effects are still pretty favourable, though gasoline prices are on pace to climb roughly 2.5% in the month, which won't do any favours for CPI. The year-ago comparables become a bit more challenging in the second half of the year, suggesting headline inflation will oscillate around 3% as we head into 2024.

Food inflation continues to bite, rising 0.8% m/m (+0.5% seasonally adjusted), keeping the yearly rate at +8.3% y/y despite the slowing on the producer front. There's likely some softening ahead for food inflation, but this will likely remain a sore spot for consumers for some time. On the soft side, household operation & furnishings prices fell 0.5%, as cell phone services saw the largest drop in 18 months, while furniture and appliance costs declined as well. Meantime, shelter prices were about as expected, climbing 0.4% m/m, with ongoing strength in mortgage interest costs (now up 29.9% y/y) partially offset by lower utilities prices and a smaller increase in rent since the fall. Energy stayed low key this month with gasoline prices slightly lower.

Core inflation came on the soft side, with the seasonally-adjusted Trim and Median measures both up 0.2% m/m. That's a three-month low for Trim and a nine-month low for Median. The softer monthly advances cut the year-over-year rates to 3.8% for Trim and 3.9% for Median, both 4 ticks lower than the prior month. The 3-month annualized increase for Trim was steady at 3.85%, while the Median slowed to +3.6%. Despite the slight improvement in the latter, both metrics remain well above the BoC 2% target and have been stuck in the 3.5%-to-4% range for the past 9 months. Note that CPIX, old core CPI, rose 0.4% m/m, also cutting the yearly rate 4 ticks to 3.7%. That's still too hot as well with the 3-month annualized rate sitting at 4%. No matter how you slice it, inflation remains a serious issue for the BoC.

Key Takeaway: While the softer-than-expected core prints are a bit of good news, every inflation metric remains far above the 2% inflation target. Accordingly, Bank of Canada policymakers won't breath a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown. The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next 2 weeks, a hike still looks likely.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics