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The Bottom Line:
Canadian inflation accelerated to 3.2% year-over-year in May from 2.8% in April, slightly higher than our pre-release expectation and driven largely by higher energy prices. Energy remained the largest contributor to headline inflation, with annual energy price growth edging higher after surging in April. Airfares also jumped higher as jet fuel prices rose, and food price inflation picked up, adding to upward pressure on overall consumer prices.
Those price increases represent real costs for households. But the rise in headline inflation remained relatively narrowly based and continued to be concentrated in higher energy costs coming from abroad rather than domestically driven price growth. Measures of core inflation remained close to the Bank of Canada’s 2% target in May, while CPI excluding food and energy ticked slightly higher to 1.6% year-over-year, suggesting price growth outside the most volatile categories remained subdued.
The Bank of Canada has repeatedly highlighted the risk that higher oil prices could eventually feed through to a broader range of goods and services prices. However, there remains limited evidence of such spillovers in the May inflation report. Inflation pressures continue to be concentrated in a relatively small number of categories, while broader measures of price growth remained contained. That is consistent with our view that while higher energy costs can gradually filter through supply chains, a weak economy and still-elevated labour market slack are limiting businesses’ ability to pass higher costs on to consumers.
Overall, the May report suggests headline inflation remains heavily influenced by energy prices while underlying inflation trends continue to move broadly in line with the Bank of Canada’s inflation target.
The details:
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Headline CPI rose 0.5% m/m (seasonally adjusted) in May, lifting annual inflation to 3.2% from 2.8% in April.
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Energy prices remained the largest contributor to inflation, with the annual pace rising to 22.2% from 19.0% in April, led by a 33% year-over-year increase in gasoline prices.
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Food cost growth accelerated to 3.8% year-over-year from 3.5% in April, reversing some of the slowdown recorded earlier this spring. Grocery inflation increased from 3.8% in April to 4.3%, driven by higher prices for fruits and vegetables, while price growth at restaurants was little changed in May at 3.1% year-over-year.
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CPI excluding food and energy came in at 1.6% year-over-year, continuing to point to relatively modest underlying pressures outside the most volatile categories.
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The Bank of Canada’s preferred core measures remained broadly stable, with CPI-trim and CPI-median both unchanged from April at 2.0% and 2.1% respectively (year-over-year). The trim services excluding shelter (“supercore”) measure ticked slightly higher to 2.6% in May from 2.5% previously.
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On a three-month annualized basis, the average of CPI-trim and CPI-median was 2.3%, compared with 1.8% in April.
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Measures of breadth remained contained. The share of CPI basket components growing faster than 3% over the last three months (seasonally adjusted basis) was 42% in May, compared with 36% in April, while the share growing at more than 5% declined to 13% from 23%. The diffusion index continued to suggest upward pressures were not becoming significantly more broad-based despite the higher headline rate.
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Shelter costs were 1.7% year-over-year in May, down slightly from 1.8% in April. Mortgage interest costs were slightly below year-ago levels for a second consecutive month and rent price growth continued to edge lower (3.5% year-over-year) from peaks recorded in prior years.
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Updated CPI basket weights were incorporated into the May release. Transportation and health and personal care expenditures received higher weights, while shelter’s share of the basket declined. The revisions had only a modest impact on aggregate readings.
About the author:
Abbey Xu is an economist at RBC. She is a member of the macroeconomic analysis group, focusing on macroeconomic forecasting models and providing timely analysis and updates on economic trends.
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