Canada’s consumer price index rose 1.7 per cent in May, matching the 1.7 per cent increase seen in April, thanks to a more balanced housing market and smaller increases in travel prices.
On a monthly basis, the CPI rose 0.6 per cent; excluding energy, the CPI rose 2.7 per cent.
Core inflation measures stayed rather steady, with both weighted median and trimmed mean CPI coming in at 3 per cent, down from 3.1 per cent in April. However, common core CPI rose to 2.6 per cent from 2.5 per cent in April.
The Bank of Canada will have one more month of CPI data before its next interest rate decision. If core inflation remains elevated, the bank might hold the interest rate at 2.75 per cent again in July.
If stronger-than-expected business and consumer spending keeps up, the Bank of Canada could decide to cut its interest rate once instead of twice this year. This would bring the policy rate down to 2.5 per cent by the year’s end.
Immigration restrictions, which resulted in Canada’s population staying flat in the first quarter, are cooling the housing market. Shelter has been the most stubborn component in inflation since the COVID-19 pandemic and record-high population growth.
Now that population growth has slowed, shelter inflation fell to 3 per cent—the lowest it has been in years. Even then, shelter inflation accounted for about half of the total increase in the consumer price index.
Mortgage interest cost index decelerated for the 21st consecutive month, down to 6.2 per cent, thanks to relatively low interest rates and lower housing prices overall. Rents rose 4.5 per cent on a yearly basis in May, the lowest since 2022.
Ontario saw the most dramatic drop as rents only grew 3 per cent as the province saw the sharpest population drop in the country. In addition, the province also saw a “dead” spring housing market with prices of condos decrease and condos and houses sat on the market unsold.
The decrease in travel prices also contributed to inflation staying low. Prices for air travel fell a whopping 10.1 per cent while prices for travel tours fell 0.2 per cent. Demand for travels, especially to the U.S., fell with worries about tariffs and the general economy.
Gasoline prices fell 15.5 per cent on a yearly basis thanks to the removal of consumer carbon pricing. For now, we do not expect the conflict in the Middle East to materially lift oil prices and inflation.
Prices for new cars rose 4.9 per cent, driven by higher EV prices. They could increase further if U.S. tariffs on vehicles remain in place because so much of the auto manufacturing is done via the integrated cross-border supply chain.
At the same time, prices of public transportation fell 5.1 per cent, partially offsetting the increase in car prices.
Rising unemployment and a relatively low effective U.S. tariff rate mean more downward pressure on inflation can be expected in the months ahead.
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