Boldly Going Where No CPI Has Gone (Since 1983), Inflation Rate Hits 7.7% in May

  • In May, the Consumer Price Index (CPI) rose by 7.7 per cent (y/y).
  • Gasoline prices rose by 12.0 per cent (m/m) and were 48.0 per cent higher than a year ago. Year-over-year food prices also increased in stores (+9.7 per cent) and restaurants (+6.8 per cent).
  • Excluding food and energy, the CPI climbed by 5.2 per cent in May. Year-over-year and month-over-month prices were higher in all eight major CPI components. Rising prices in many shelter and transportation subcategories remained key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI went up 1.1 per cent in May, which was higher than the increase of 0.9 per cent in April.
  • The average of the Bank of Canada’s three core inflation measures bumped up to 4.7 per cent in May from 4.4 per cent in March. CPI-trim increased to 5.4 per cent, CPI-median grew to 4.9 per cent, and CPI-common moved up to 3.9 per cent.

Key Insights

Another month, another uncomfortably high inflation reading. Price growth was broad-based across categories, though the usual suspects appeared again in May. Gasoline price increases, for example, remain astoundingly high. This month’s release also included used car price data for the first time and combined with a recent update to the CPI basket likely mechanically increased price growth in May’s published figures.

Even as interest rates rise, headline inflation figures will remain elevated. Interest rates began to increase in March. But monetary policy does not work overnight. And even if it did, rates technically remain in “stimulative” territory (below the neutral rate). In July, it will not be surprising to see the Bank of Canada follow the Federal Reserve’s recent 75-basis point rate increase to reach the neutral range more quickly. But higher interest rates can’t do much to solve some of the more critical causes of current inflation, such as supply chain problems. Many other countries are also struggling to control price growth as the causal factors are largely global. For Canadian households and businesses, these problems feel like they are resolving in slow motion, while monthly CPI figures provide more frequent anxiety.

Managing inflation expectations is a key feature of the Bank of Canada’s aggressive stance. The Bank is eager to avoid the potential for renewed inflationary momentum through a wage-price spiral. Naturally, workers demand higher wages when prices increase. But businesses are incentivized to increase prices if the cost of labour increases. This circle can become vicious and self-fulfilling if expectations of future price growth are not reeled in. Ominously, short-term (one-year ahead) consumer inflation expectations popped upward in our June Consumer Confidence survey. On the bright side, Canadians understand that most of the trouble is caused by global developments. Long-term (three-year ahead) consumer inflation expectations decreased in June which hints at Canadians’ faith that this too shall pass. But they are holding on tight until it does.