This is not what the Bank of Canada wanted to see. The jump in inflation observed in May in the country risks making the central bank think about a month before its next meeting – where it will decide whether to lower its key rate again.
Prices for cell phone plans, package tours, airline ticket prices and rent pushed the Consumer Price Index (CPI) to 2.9% in May, Statistics Canada reported Tuesday. This is higher than the 2.7% price increase seen in April.
This is the first time in 2024 that inflation has exceeded economists’ expectations. They expected price growth of 2.6% in May.
“There is no doubt that this is not what the Bank of Canada wanted to see,” said Douglas Porter, chief economist at BMO, in an analytical note. This clearly reduces the chances of a further rate cut [on July 24]. »
The Desjardins Group is more nuanced. Despite the upturn observed last May, inflation remained within the Bank of Canada’s target range of 1% to 3% for a fifth consecutive month, notes the cooperative financial group.
If its economist Randall Bartlett expects a second consecutive cut in the key rate in a month, he warns that the coming weeks will be decisive.
“The next figures on employment and inflation will be of greater importance,” he underlines, in a report.
Between now and the next meeting of the Bank of Canada, economists will have their eyes glued to the next data on inflation, Statistics Canada’s portrait of gross domestic product (April) as well as the portrait of unemployment from federal agency.
Despite everything, the most recent indicators from Statistics Canada sow doubt among a growing number of observers as to when we could see a further reduction in the key rate – an announcement expected, in particular, by mortgage loan holders. floating rate.
By increasing its base rate to 4.5% on June 5 – a cut of 25 basis points – the Bank of Canada signaled that further cuts were to come. Playing cautiously, its governor, Tiff Macklem, had not opened his game on the possibility of further relaxation from July 24.
“We make our rate decisions one at a time,” he repeated.
Since then, the summary of the deliberations of the board of the institution had revealed that Mr. Macklem and his deputies were juggling the possibility of waiting until July to lower interest rates. The latter particularly feared a stagnation of progress in curbing inflation.
Even if we should not see a trend taking hold despite the disappointing data for the month of May, TD Bank senior economist James Orlando nevertheless believes that the Statistics Canada report demonstrates the difficulty in reconnecting with the inflationary target by 2%.
“For this reason, we believe that the Bank of Canada will opt for a pause in July before cutting rates again in September,” he believes.
Overall, the increase in prices for services increased by 4.6% in May after the 4.2% increase in the previous month, notes Statistics Canada.
At the grocery store, food prices began to grow more quickly year-over-year in May (1.5%) after slowing in April. This monthly growth is mainly attributable to the price of fresh vegetables, meat and fresh fruit, according to the statistical agency.
This category has weighed heavily on household spending since the arrival of COVID-19, according to Statistics Canada: since 2020, the price of food has jumped by approximately 22.5%.
“This is a major headwind for households that risks continuing to fuel bargain-hunting behavior,” believes Irene Nattel of RBC Capital Markets.
In Quebec, inflation rose from 3% in April to 3.1% in May.
