By Robb M. Stewart
OTTAWA--A surprise spike in Canadian inflation last month throws up a possible hurdle for the central bank to offer up back-to-back rate cuts and is a fresh reminder of the price pressures consumers still face.
The consumer-price index, a measure of goods and services prices across the economy, rose 2.9% in May from a year earlier, Statistics Canada said Tuesday, faster than the 2.6% advance economists had forecast and after inflation eased to 2.7% in April.
While it marks a fifth straight month that the index has been inside the 1% to 3% window the Bank of Canada targets, the quickening pace of inflation casts doubts on what many economists have expected would be a second round of rate relief late next month. The Canadian dollar and domestic bond yields both rose after the data was released, suggesting traders are less confident in a July cut.
Gains in core prices excluding volatile food and energy matched the headline CPI pace for the month and annually, while key indicators of underlying inflation preferred by the central bank also picked up. On a monthly basis, headline inflation rose 0.6% in May, double the pace economists anticipated.
"No bones about it, this is not what the Bank of Canada wanted to see at this point," Douglas Porter, chief economist at Bank of Montreal, said.
Like other economists, Porter doesn't rule out a July cut but he said a bumpy path for inflation also means the outlook for the Bank of Canada isn't smooth. The latest data put more weight on upcoming jobs data and one more inflation report that will come out before policymakers next meet, and economists said any further signs of sticky inflation likely will move the central bank back to the sidelines.
Central banks have insisted each rate decision will be data driven. In a speech Monday, Bank of Canada Gov. Tiff Macklem said there was increased confidence inflation would continued to approach the central bank's 2% target this year and that signs of slack in the labor market thanks to strong population growth suggest the economy can grow without creating new inflationary pressures. Policymakers can't rule out new bumps in getting inflation under control, but Macklem said the country increasingly looks to be on its way to 2%.
Earlier this month, the Bank of Canada became the first Group of Seven central bank to trim its policy interest rate, cutting it one-quarter percentage point to 4.75% after leaving it at a more than two-decade high for almost a year.
What is expected to stand out for policymakers is the speeding up in May of two measures of underlying inflation the central bank closely monitors. Weighted median and trimmed mean CPI rose an average 2.85% last month from a year earlier compared with 2.70% growth in April, though that is still cooler than March's 2.95% pace.
The central bank won't want to risk working against efforts over more than two years to tackle inflation, which peaked at just over 8% in mid-2022 thanks to a combination of a surge in demand, stuck global supply and Russia's invasion of Ukraine. As inflation has cooled through much of this year the economy returned to growth in the first quarter after stalling in mid-2023. Hiring continues but at a slower pace than population growth is expanding the labor force, so unemployment has been steadily rising and wage inflation has been softening.
The biggest drivers of consumer price growth in Canada last month remained mortgage-interest costs and rent in the higher rate environment.
Consumers also paid more for services including travel tours and flights, while prices for food bought at stores increased for the first time since last June, though only modestly. Grocery prices remain elevated, and have increased 22.5% compared with May 2020.
Overall, prices for services in Canada rose 4.6% in May after a 4.2% boost the prior month, while prices for goods for a second straight month grew 1.0%.
"The past few months had seen price pressures cooling more than expected, so today's release might simply represent some give back," said Desjardins Capital Markets head of macro strategy Royce Mendes, adding there remained time for data to turn before the next interest rate decision. Still, he noted markets are now pricing in a 40% chance of a July cut, down from 60% just before the inflation report.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
06-25-24 1125ET
