By Nojoud Al Mallees in Ottawa
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 per cent 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 nine per cent 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 its key rate by a quarter-percentage point to 4.75 per cent earlier this month.
But forecasters 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 the sideline for the rest of this year," wrote RBC economist Claire Fan in a client note.
While the central bank is still focused on restoring price stability, Canada has made significant progress on the inflation front compared to last summer when inflation hit a peak of 8.1 per cent.
Stephen Gordon, an economics professor at Laval University, says the large price increases caused by the Russian invasion of Ukraine have faded from the calculation of the year-over-year inflation rate.
"Most of that was, in fact, transitory," Gordon said. "On the other hand, inflation is leveling off, but it's leveling off at levels that the bank would not be comfortable with."
Gordon is also expecting that the Bank of Canada will raise interest rates again. He says the central bank is concerned with inflation expectations, and is moving aggressively to make sure that consumers and businesses don't get used to three to four per cent inflation being the norm.
The slowdown in the headline rate comes after inflation ticked up in April to 4.4 per cent, 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.
Moving forward, the central bank signalled it would make its next rate decision based on incoming economic data, suggesting it hadn't made its mind up yet.
As it gauges inflation pressures, the central bank will be paying particular attention to its core measures of inflation, which strip out volatility. Those measures also declined last month.
For Canadian households, the effect of inflation varies depending on personal circumstances. Households with variable rate mortgages or new homeowners, for example, are facing rapidly rising mortgage interest costs.
The federal agency notes that the mortgage interest cost index increased at the fastest pace on record, rising by nearly 30 per cent on a year-over-year basis.
Households that spend a considerable amount on groceries, such as those with kids, are also likely feeling the squeeze.
This report by The Canadian Press was first published June 27, 2023.
Banner image via The Canadian Press
