May CPI not enough to prompt higher rates in Canada
Canada’s May inflation release showed price growth of 3.2% YoY, up from 2.8% in April, landing 0.2pp above consensus expectations.
Still, we think this data is unlikely to prompt action from the BoC, having looked at the finer details. Underlying price growth continues to prove much softer, matching economist forecasts, while showing few signs that rising energy costs are translating into broader inflationary pressures.
Admittedly, the BoC has chosen to de-emphasize its own preferred measures of underlying inflation over recent months.
Even so, we continue to think it is relevant that both core-median and core trim price growth remained unchanged in May, the former at 2.1% YoY, the latter at 2.0%, with both readings in line with market expectations. Breaking down the CPI report further, gasoline alone added roughly 1.3% to headline inflation last month –unsurprising, given ongoing disruption to global energy supplies. That aside, food contributed 0.6%, and shelter added a further 0.5% to annual all-items CPI growth, with both little changed from April. Other components also showed few signs of variation relative to the month before, while contributing only modestly to the overall inflation rate.
In short, then, underlying CPI growth remains close to the BoC’s inflation target, with few if any indications that higher energy costs are threatening wider price stability as yet.
Accordingly, the path of least resistance for the BoC remains to watch, wait, and see what happens, especially with USMCA renegotiation still a looming concern, one that has been explicitly referenced by Governor Macklem in recent communications. Certainly, a modest hawkish repricing post-release looks premature to us, despite today’s headline beat. But that adds further downside risk to the expected policy rate path, leaving us cautious of turning too optimistic on the loonie.
While headline inflation spiked again in May on higher energy costs, underlying price growth remains close to the BoC’s inflation target
Source: Bloomberg, Monex Europe