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  • Writer's pictureJose Gustavo Salcedo

Inflation in Canada Unexpectedly Rises in May: What This Means for Future Rate Cuts

Inflation in Canada Unexpectedly Rises in May: What This Means for Future Rate Cuts

In May, Canada's annual inflation rate unexpectedly accelerated to 2.9%, complicating prospects for a potential rate cut in July. This increase was primarily driven by higher prices for services, as reported by Statistics Canada. Here's a breakdown of the key points:


What Happened?


  • Inflation Rate: The annual inflation rate rose to 2.9% in May, up from 2.7% in April. This was contrary to analysts' expectations, who had forecast a drop to 2.6%.

  • Consumer Price Index (CPI): On a month-over-month basis, the CPI increased by 0.6%, surpassing the expected 0.3% rise.


Main Drivers of Inflation


  • Service Prices: The surge in inflation was largely due to higher prices for services such as cellular services, travel tours, rent, and air transportation.

  • Core Inflation Measures: The Bank of Canada's preferred measures of underlying inflation, CPI-median and CPI-trim, both increased for the first time since December. CPI-median rose to 2.8% from 2.6%, and CPI-trim went up to 2.9% from 2.8%.


Implications for Future Rate Cuts


  • Bank of Canada's Stance: Earlier this month, the Bank of Canada lowered its policy rate to 4.75%, citing progress in reducing inflation. However, the recent data complicates further rate cuts.

  • Market Expectations: With another month of inflation data due before the next rate announcement on July 24, money markets currently see a nearly 70% chance of a rate cut.


Other Key Details


  • Grocery Prices: For the first time since June 2023, grocery price growth accelerated. Compared to May 2020, grocery prices have risen by 22.5%.

  • Energy Prices: Annual energy price inflation slowed to 4.1% from 4.5% in April.

  • Excluding Food and Energy: Prices excluding these volatile components rose by 2.9%, up from 2.7% in April.

  • Service and Goods Inflation: Service prices increased by 4.6% in May, compared to a 4.2% rise in April, while goods inflation remained steady at 1%.


Conclusion

The unexpected rise in inflation in May casts uncertainty on the Bank of Canada's upcoming decisions regarding interest rate cuts. The central bank will closely monitor the data before making any further moves, with the next key date being July 24.


Adapted by Jose Gustavo



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