Update: Inflation Rate Drops to 3.4%
Statistics Canada have announced that the annual inflation rate for May cooled by a full percentage point to 3.4 per cent.
The annual rate of inflation experienced a significant drop last month, leading to discussions among economists about its potential impact on the Bank of Canada’s decision regarding another rate hike in July.
According to Statistics Canada, the annual inflation rate for May decreased by a full percentage point to 3.4 percent. This decline surprised many economists who had expected a more modest drop to 3.6 percent, as headline inflation had reached 4.4 percent in April, marking the first increase in 10 months.
Nathan Janzen, assistant chief economist at RBC, explains that the main contributing factor to the decrease in inflation is the difference in energy price trends compared to the previous year. Energy prices were down by 12.4 percent year-over-year in May, which significantly impacted the annual inflation data. The spike in gasoline and oil prices during the spring and summer of 2022, driven by Russia’s invasion of Ukraine, is no longer reflected in the year-to-year price growth.
While overall inflation has cooled down, grocery price inflation remains high, with a 9.0 percent year-over-year increase that has remained relatively unchanged since April, according to Statistics Canada. Janzen suggests that the Bank of Canada will not focus solely on the decline in annual figures because they are heavily influenced by the higher prices of the previous year. Instead, policymakers will pay closer attention to shorter-term monthly trends and the central bank’s preferred “core measures” of inflation to determine if price pressures have subsided enough.
The release of Tuesday’s Consumer Price Index (CPI) report holds significant importance for the Bank of Canada, as it will influence their decision on whether to implement another rate hike in July. However, Janzen notes that inflation is often a “lagging indicator,” reflecting past economic events rather than predicting future trends. The central bank will also consider other economic releases, such as the June jobs report and its own business outlook survey, to gauge the trajectory of inflation and assess if further measures are needed to bring it down to the desired two percent mark.
According to Janzen, significant signs of economic slowdown in these upcoming releases will be necessary for the Bank of Canada to reconsider its course of action. If policymakers were already unsatisfied with the 425 basis points of policy rate tightening implemented thus far, an additional 25 basis points is unlikely to convince them that inflation is on track to return to the two percent target. The central bank will rely on various indicators to evaluate the future trajectory of inflation rather than focusing solely on its current level.
Original article:
Economists predict a sharp decrease in the annual rate of inflation last month, but there is debate over whether this slowdown will deter the Bank of Canada from implementing another interest rate hike in July.
The consumer price index (CPI) report for May, which will provide further insights, is scheduled to be released by Statistics Canada today.
Most economists anticipate a significant drop in the headline inflation rate after it unexpectedly rose to 4.4 percent in April, marking the first increase in ten months. BMO Economics projects a one-percentage-point decline to 3.4 percent, reaching a two-year low in the annual rate, despite the resurgence in the housing market putting pressure on the shelter component of CPI. On the other hand, RBC Economics expects a more modest decline to 3.6 percent.
According to Nathan Janzen, assistant chief economist at RBC, the main contributing factor to the decline is the difference in energy prices compared to the previous year. In 2022, gasoline and oil prices surged due to Russia’s invasion of Ukraine, but these price increases are not reflected in the annual inflation data this year, leading to diminished year-to-year price growth. Janzen believes that the Bank of Canada will focus less on the decline in annual figures and instead pay closer attention to shorter-term monthly trends and the central bank’s preferred “core measures” of inflation. This data will be crucial in determining whether the recent increase in price pressures has been adequately addressed.
Janzen emphasizes that today’s CPI release is highly significant for the Bank of Canada as it assesses the need for a second consecutive rate hike in July.
However, he also notes that inflation tends to be a “lagging indicator” that reflects past economic conditions. Other economic releases, such as the June jobs report and the Bank of Canada’s business outlook survey, scheduled prior to the July 12 rate decision, will provide further information on whether enough progress has been made to bring inflation down to the desired two percent mark.
Significant indications of economic slowdown in these releases would be necessary for the central bank to pause its tightening measures. Janzen suggests that if policymakers believe the initial 425 basis points of rate tightening were insufficient, an additional 25 basis points would not convince them that inflation is on track to return to the target level.
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