Pace of Price Growth Picked Up in May

Key insights

Headline inflation picked up in May as price growth for several services accelerated. Price growth for cellular services, which had been a deflationary force in April, added to the CPI’s year-over-year increase in May. Price growth for travel tours, air transportation, and gasoline also added inflationary pressure. Mortgage interest costs maintained their place as a key contributor to year-over-year price growth, and rent costs accelerated to 8.9 per cent (y/y) from 8.2 per cent in April. Overall prices for services picked up to 4.6 per cent (y/y) from 4.2 per cent last month. Excluding shelter, however, the CPI grew by 1.5 per cent (y/y).

Interest rates have started to fall but the timing of further cuts will hinge on incoming data. The Bank of Canada saw inflationary pressures had eased enough by June to cut their policy rate by 0.25 per cent, marking the first cut in four years. Communications from the Bank make it clear that further cuts will be contingent on the key indicators watched by the Bank, including the path of core inflation, corporate pricing behaviour, inflation expectations, and the balance of supply and demand in the economy. The rise in core inflation in May will do little to increase the odds of another imminent rate cut, but, as the economist’s truism asserts, one month doesn’t necessarily make a trend. All the same, May’s report highlights the threat of idiosyncratic price changes (e.g., cellular services, travel tours) to inflation’s downward path.

Service price dynamics remain the primary source of risks to the inflation outlook. Many shelter items are lumped into the services category, and prices for many other services are also closely linked to wage growth. However, labour productivity has marched out of step with wages and has declined for 7 of the last 8 quarters. Elevated price growth for services has recently been offset by low inflation for many goods, which won’t necessarily continue. We expect that wage growth will decelerate as labour market pressures have eased. But the risk that it doesn’t – and that productivity growth remains weak – could keep inflation higher for longer.