Canadian Inflation Likely Peaked in May

• Headline CPI inflation jumped up to 3.2% year-on-year (y/y) in May up from 2.8% in April, above consensus expectations. Higher prices at the pump were the main culprit, with inflation ex-gasoline up a more modest 2.2% y/y.
• Prices at the pump were up 33.2% y/y in May reaching their highest levels since June 2022. Food inflation also picked up to 3.8% y/y, from 3.5% in April, driven by prices for fresh fruits and veggies (+9.0% y/y).
• Shelter inflation gave back April’s uptick and is now 1.7% y/y in May. Overall services inflation was 2% y/y in May, up slightly from April, but still well below its pace over the prior four years. Core goods inflation cooled very slightly to 1.4% y/y from 1.6% y/y in April.
• The AI boom is showing up in Canadian inflation now too as prices for computer equipment, software and supplies rose 3.9% y/y, after being basically flat in April, putting upward pressure on prices for durable goods (+1.9% y/y).
• Core inflation was steady. The Bank of Canada’s preferred core inflation metrics (median and trim) averaged 2.1% in May, unchanged from April. However, both measures have risen above 2% on a three-month annualized basis, in line with the uptick in core inflation in our recent quarterly forecast.

Key Implications

• Oil prices are down significantly since a tentative peace deal between Iran and the U.S. was reached, and gasoline prices have been following suit. We expect May to mark the peak for headline inflation this year. We expect May to mark the peak for headline inflation this year. As expected, we are seeing somewhat higher core inflation in recent months, but we don’t expect it to rise to a level that raises alarm bellow for the Bank of Canada.
• Apart from energy costs and some emerging tech price pressures inflation remains very well behaved in Canada, as a relatively soft demand backdrop leans against sellers raising prices. We expect this to keep the Bank of Canada on the sidelines for quiet some time. Bond markets yields are so far little moved by today’s numbers.