June 22, 2022 | 09:16
CPI = Cannonading Price Increases
Canadian consumer prices jumped 1.4% in May, driving the annual headline inflation rate up to 7.7% y/y from 6.8% the prior month, and marking the fastest pace since 1983. In seasonally adjusted terms, prices were up 1.1% m/m, the fastest monthly rise since the series began in 1992. The hefty increase was well above (seemingly heated) expectations, and was spearheaded by a 12% surge in gasoline prices in the month. But, make no mistake, price gains were spread far and wide, with all three measures of core taking another big step up—from upwardly revised levels! The crude average of the three metrics stepped up 3 ticks to just above 4.7%. Note that while much of the attention is on gas prices, inflation excluding energy ran at a hot 5.8% pace last month, or almost double the top end of the BoC's target band; even ex food & energy, CPI was up a hefty 5.2%.
In other words, we have a problem.
Given that gasoline prices are on track to rise by at least 5% further in June, we may very well be testing the 8% threshold on headline inflation in next month's report. This pace of inflation puts Canada roughly in the middle of the pack among industrialized economies, with Britain (9.1%), the U.S. (8.6%) and the Euro Area (8.1%) still a bit higher, but Australia (5.1%) and Japan (2.4%) lower. For all of this year, we expect Canadian inflation to average 7.2%, and have bumped up next year's call to 4.5% (from 4.0%).
Beyond the shock at the pumps last month (which was as billed), the other big drivers (which were not) included a 14.3% surge in hotel/motel rates as Canadians began traveling in earnest again; a 2.9% pop in furniture costs; and, a 0.8% rise in vehicles. The latter was split between a small 0.1% uptick in new vehicles and a 2.2% rise in used cars. Used vehicles were included for the first time with this release, and StatCan suggested that it made no material impact on the headline inflation result. We will also note a potential source of future inflation pressure—mortgage interest costs were reported at down 2.7% y/y (vs -4.4% in April), and will almost certainly be printing some serious positive figures in coming months given the rapid back-up in rates this year.
One standout result from the provincial data is that we now have one double-digit inflation reading. PEI reported an 11.1% y/y surge in prices over the past year—suffice to say, that's no small potatoes.
Bottom Line: Another month, yet another high-side surprise on inflation. While energy will shoulder much of the blame for the latest spike, it's important to note that many measures of core inflation are now at or near 5%, so this is well beyond a one-off move that will quickly fade even if oil prices relent. For example, note that services—which are almost exclusively driven by domestic forces—are now up 5.2% y/y. The key takeaway is that the Bank of Canada still has lots of work to do, with a 75 bp hike in July almost fully baked in, and we suspect another 100 bps of tightening to follow that through the remainder of the year. Just like the consensus on inflation, the risks to that view seem tilted to the high side.