Price Growth Deceleration Supported by Base Effects in May

  • In May, the Consumer Price Index (CPI) rose by 3.4 per cent (y/y). This was lower than April’s 4.4 per cent (y/y) increase.
  • Gasoline prices fell by 0.8 per cent (m/m) and were 18.3 per cent lower than a year ago. Year-over-year, food prices increased in stores (+9.0 per cent) and restaurants (+6.8 per cent).
  • Core CPI (excluding food and energy) grew by 4.0 per cent in May (y/y), lower than the 4.4 per cent increase (y/y) in April. Higher prices in several shelter and food subcategories were key to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.1 per cent in May (compared to an 0.5 per cent increase in April).
  • The average of the Bank of Canada’s three core inflation measures fell to 4.3 per cent in May from 4.7 per cent in April. CPI-common fell to 5.2 per cent, CPI-median dropped to 3.9 per cent, and CPI-trim slid to 3.8 per cent.

Key insights

As base comparison months from last year continue to fall out of measured inflation, consumer price growth fell under 4 per cent (y/y) in May. Declining year-over-year prices for gasoline contributed significantly to bringing down headline inflation. However, mortgage interest costs remain a concern. Although increasing mortgage interest costs are a direct result of the Bank of Canada’s interest rate hikes, they will continue to add pressure to CPI growth as more mortgages are renewed at higher rates, especially as interest rates have not yet reached their terminal point.

With stubbornly elevated core inflation and persistent excess demand, the Bank of Canada will likely raise interest rates again in July. Stronger-than-anticipated consumer spending growth in the first quarter of 2023 was one of the key factors behind June’s interest rate hike.And although Canada’s housing market was slowing, it was already showing signs of turning around despite tighter monetary policy. If interest rates do not have their intended effect—namely, excess demand does not fall—there are grounds for raising them higher. But the longer inflation remains above target, the more likely households adjust their behaviour and expectations in more enduring ways. In its annual report, the Bank for International Settlements sees the potential for inflation expectations to become de-anchored as workers’ wage demands push to make up for lost ground and include compensation for future price growth. This can make it more challenging to bring the rate of price growth down.

Structural changes may keep interest rates above their pre-pandemic range even after the current bout of inflation is reined in. The Bank of Canada sees interest rates as likely higher in the long-term relative to the years preceding the pandemic. As demographic changes and other structural forces in the economy shift, Deputy Governor Beaudry recently encouraged Canadians to be prepared for higher interest rates in the future. If rates are higher for longer, consumer borrowing, saving, and investment decision-making could change significantly throughout the medium run.