Although Canadian inflation slowed in May to 3.4%, as predicted by economists, many do not believe that will be enough to persuade the Bank of Canada to hold off on raising interest rates at its upcoming meeting on July 12.
Since June 2021, the CPI growth has been at its lowest level. In May, monthly inflation increased by 0.4% or 0.1% when seasonally adjusted. The CPI increased by just 0.1% month over month in May, while both the CPI-trim and CPI-median, the Bank of Canada’s favored inflation gauges, had their monthly advances fall to 0.2%.
Bank of Canada Rate Increase
Additionally, the number of CPI components that increased by 3.5% to 5% in May continued to decline, indicating that the economy’s overall exposure to inflation is decreasing. The year-over-year readings for the preferred inflation indicators used by the Bank of Canada, according to experts, are still stuck much above the bank’s 2% target.
Markets had estimated a 70% possibility of a raise at the central bank’s July meeting before the release of the inflation data. That dropped to 60% after the news. There is still a tonne of crucial information that will be considered by the Bank of Canada before reaching its decision on July 12; they include the April GDP and the Business Outlook Survey, both of which will be released on June 30. July 7 will see the release of the June jobs data.
- Canadian inflation slows to 3.4%, Bank of Canada may raise interest rates.
- CPI components decline in May, indicating decreasing inflation exposure; Bank of Canada’s target remains high.
- Energy costs rise, inflation rate declines to the Bank of Canada’s 1%-3% target, challenging the broader goal.
Even though Canadian inflation continued to decline in May, the Bank of Canada is still likely to raise interest rates in July despite the improvement. Core inflation is very slowly improving, especially in the services sector, where discretionary prices like travel and dining out are increasing (6.8% year over year in May). Although lower goods inflation is welcome, the Bank of Canada will likely raise interest rates by another quarter point in July to ensure that demand and, consequently, price pressures, continue to fall.
The breadth of inflation decreased, with about half of the components exceeding the goal in May as opposed to an average of almost three-quarters during the previous three months.
However, the monthly pace of price increases was still twice as strong as it would be if inflation were back to normal, and the underlying core measures remain too high for comfort. This could be an early indicator of moderating price pressures following months of re-acceleration.
Energy costs rise, inflation rate expected to decline in June, potentially reaching Bank of Canada’s 1%-3% target range. Beyond that, it will be much tough to achieve additional lowering in broader inflation readings back to the 2% objective.
While inflation expectations are still high and inflationary pressures are still widespread and probably sticky, inflation continues to decline but is still well above the Bank of Canada’s target rate of 2%.
The recent inflation dynamic, as assessed by the three-month annualized changes, is likely to be seen as mildly worrying by the BoC, and it may decide to support another increase in interest rates at the July meeting. Higher interest rates are, however, having a substantial effect on inflation, which is currently 2.3% when food, energy, and mortgage interest payments are excluded, and an annualized change from three months to three months of roughly 2.5%.
