Canadian inflation shows resurgence in May

Bank of Canada faces tough decision on interest rates

by Faruk Imamovic
Canadian inflation shows resurgence in May
© Getty Images/Carlo Allegri

Underlying inflation showed a resurgence in May. The average of trim/median was +0.33% MoM, the strongest reading since December. Its three-month trend rose to +0.21%, a sharp increase from +0.14% in April.

Traditional core (ex food and energy) was also firm at +0.4% MoM, its strongest in more than 18 months. A shift in component weights implemented with the release may have impacted this figure.

Implications for Bank of Canada Policy

The eventual decision will hinge largely on the results of the BoC surveys next month and the CPI reading for June. The latter will need to show a significant moderation from May for the BoC to consider another rate cut.

Beyond July, another 25 bps cut in October and a further 125 bps of cuts in 2025 is anticipated. Policy divergence with the US is likely to become pronounced in coming quarters. By end-25 we expect an Overnight rate of 3.25%, 138 bps lower than our estimate for the Fed funds rate (4.63%).

Key Details in Canada's Inflation Data

  • 1. Durable goods: This remained steady at -0.8% YoY. Recently it has caught up to its US equivalent measure.
  • 2. Shelter: Overall this component showed a slight deceleration to +0.4% MoM. The two largest components moved in opposite directions. Rented accommodation re-accelerated to +0.9% MoM, while mortgage interest costs showed a sharp deceleration to +0.8% MoM. Mortgage interest costs are likely to continue to decelerate ahead with the BoC's June rate cut likely to weigh on the reading for June.
  • 3. Communications: This was firm for the second consecutive month. YoY relief from this source lessened, a development that should continue and may frustrate the extent of any further disinflation in coming months.
  • 4. Travel services: This was firm at +2.4% MoM. Key subcomponents appear to all show a rising YoY trend with this most apparent in travel tours (+6.9% YoY) and air transportation (+4.5% YoY).

Weighting Shifts - MIC Rises to 7.3% of Core CPI

With this release, there were changes in category weightings. The most notable shift was in mortgage interest costs. Its share rose to 7.3% of core CPI (up from 5.0% previously).

This component is leveraged to interest rates. The higher weight may mean BoC rate decisions have a greater impact on monthly total CPI (and traditional core) than previously. However, the impacts on the BoC's targeted measures (trim and median) should be more limited.