CPI stats show inflation problems haven’t gone away, leaving rate cuts uncertain

What do economists make of the latest rise in the Consumer Price Index

CPI stats show inflation problems haven’t gone away, leaving rate cuts uncertain
Steve Randall

The Canadian Consumer Price Index moved higher in May according to new data from Statistics Canada, keeping inflation concerns alive.

The rise from 2.7% (annual rate) in April to 2.9% last month was driven by higher costs for services (4.6% in May vs. 4.2% in April), especially cellular services, travel tours, rent and air transportation, while goods remained at a 1% rate.

Food prices were slightly higher with a 1.5% year-over-year increase in May compared to 1.4% in April, but households are also being challenged by rent rises, especially in Ontario with an 8.4% year-over-year rise in May versus 6.4% in April.

Overall prices were up an on annualized basis in six provinces last month.

But what does all these mean for interest rates?

“[Today’s] inflation data shows that Canada’s path to 2% will be a bumpy road but doesn’t rule out multiple rate cuts in the rest of 2024,” said Jules Boudreau, Senior Economist at Mackenzie Investments, adding that the CPI increase was the first this year to exceed economists’ expectations.

“Three-month annualized inflation - probably the most telling indicator of “trend” inflation — jumped back to 3% after hovering around 2% for the last few months. The Bank’s preferred measures of “core” inflation, which attempt to strip out noise, are around 2.5% on a three-month annualized basis,” Boudreau noted.

Overall, while there is more data to come, he believes that there will still be multiple rate cuts by the BoC this year, with the next one still potentially in July.

TD Economics’ James Orlando expects the central bank to take a cautious approach in the near term.

“One bad inflation print doesn't make a trend, and inflation remained below 3%. But it does speak to the unevenness of the path back to 2%. For this reason, we think the BoC will likely pause at its July meeting, before cutting rates again in September,” he said.

Geoff Phipps, Trading Strategist, portfolio manager at Picton Mahoney, said it's “difficult to say at this juncture if the May CPI print is simply giving back a more rapid pace of inflation deceleration exhibited over the last four months, or if new price pressures are emerging.” He pointed to a flurry of data before the July BoC meeting as being critical to the bank’s July decision.

Too soon?

Meanwhile, Derek Holt at Scotiabank Economics opined “Tiff should’ve whiffed” – believing that the BoC moved too soon with its June rate cut.

“I would not have cut in June if I were Macklem. I listened to him when he said he wanted “months” of additional evidence,” he wrote in a client note. “I view that cut as policy error because it violated forward guidance and prematurely reacted to only four months of soft core inflation after blowing it for four years and with the economy outperforming the BoC’s expectations over 2024H1 compared to their gloomy bias at the start of the year.”

While Holt and his team think there is case to keep rates on hold, they expect three cuts over the year based on Macklem’s “bias to cut and keep cutting.” However, a July cut will depend on the data.