Canada’s inflation rate tumbled in May as price shocks caused by the Russian invasion of Ukraine have been mostly absorbed, but economists are still expecting the Bank of Canada to move ahead with another rate hike next month.
Statistics Canada reported Tuesday the annual inflation rate fell to 3.4% in May, largely due to lower gasoline prices compared to a year ago.
That’s the lowest it’s been since June 2021.
However, the long-awaited decline in food inflation has yet to come through in Canada. Grocery prices were up 9% on an annual basis, showing little improvement from April.
The decline in overall inflation is likely welcome news for the Bank of Canada, which is gearing up for its next interest rate decision on July 12 after raising a quarter-percentage point to 4.75% earlier this month.
But forecasters at commercial banks are still leaning toward another rate hike, noting underlying price pressures — particularly on the services side — are still high.
The central bank will have a few more data releases to consider before its next rate decision, including a jobs report and a reading on real gross domestic product.
“Absent a large downside surprise from those data releases, we continue to expect the bank to hike the overnight rate by another 25 basis points in July, before stepping back [on] the sideline for the rest of this year,” wrote RBC economist Claire Fan in a client note.
The slowdown in the headline rate comes after inflation ticked up in April to 4.4%, marking a slight reversal of the progress made since last summer.
The Bank of Canada justified its most recent rate hike in part by pointing to the slight rise in inflation in April. It’s expected to make its next interest rate decision based on incoming economic data, including Tuesday’s inflation report.
The central bank will be paying particular attention to its core measures of inflation, which strip out volatility. Those measures also declined last month.
Forecasters and the central bank were expecting inflation to fall considerably this year to about 3% this summer. That’s because of what economists call base-year effects, whereby price movements a year ago affect the calculation of the inflation rate.
Given the rapid run-up in prices that occurred in the first half of 2022 after the Russian invasion of Ukraine, the pace of inflation is slower today because prices are being compared to those elevated levels.