Quick take

Inflation hits a decade high

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The Conference Board of Canada’s economist Anna Feng offers the following insights on the May Consumer Price Index (CPI).

Inflation accelerated again in May to 3.6 per cent, due mainly to ‘base effects’ on gasoline prices which recovered from the plunge last spring. Higher prices for consumer goods, including cars, new homes and food also contributed to the strong inflation figure last month. Going forward, we expect strong consumer spending coupled with supply shortages will keep inflation hot for the rest of 2021.

  • The Consumer Price Index climbed higher again in May to 3.6 per cent above its level last year, breaking the record of fastest year-over-year growth in the past decade.
  • While May’s inflation reading was still heavily influenced by the temporary “base effects,” where prices today have rebounded strongly from the plunge last year at the early stage of the pandemic, prices of goods also went up, contributing to the strong growth in consumer prices last month.
  • Rising gasoline prices, partially due to the disruption in oil supply in the U.S., continue to be one of the main contributors to the strong uptick in inflation seen last month. Global demand for oil is recovering, as more economies reopen, helping to push the price of gasoline up to a 34-months high.
  • Excluding gasoline, CPI was up 2.5 per cent in May, slightly higher than the average growth of 2.3 per cent in 2019.
  • The red-hot housing market and increasing lumber prices continued to stimulate home prices last month. The homeowner’s replacement cost index—an index that incorporates new home prices—increased by 11.3 per cent in May, its highest year-over-year growth in the past 34 years.
  • Compared to April, Canadians paid significantly higher prices for food at grocery stores, rent and cars, while prices on health and personal care services and clothes dropped in May. In the case of vehicle prices, the shortage of semi-conductors has pushed up the cost of production for auto-manufacturers around the world, which is now reflected in consumer prices.
  • The average of the Bank of Canada’s three measures of core inflation edged up 2.3 per cent last month, the highest rate since March 2009.
  • Overall, May’s inflation figures reflect the fast growth in consumer prices ranging from gasoline to new homes. Going forward, while the “base effect” of gasoline prices will start to have a smaller impact on headline inflation, rising production costs will likely be passed onto consumers and keep inflation close to 3 per cent for the rest of 2021.

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