Canadian Inflation Slows Down, but Another Rate Hike Looms


Canadian inflation has shown some positive signs recently, with the Consumer Price Index (CPI) growth rate falling below market expectations. However, a closer look reveals that short-term metrics remain stubborn, prompting experts to predict another rate hike in the near future. In order to gain insight into the current state of Canadian inflation and its implications for monetary policy, we examine the most recent statistics from Statistics Canada (Stat Can) and Benjamin Reitzes, Canadian Rates & Macro Strategist at BMO.

The latest data from Statistics Canada indicates that Canadian inflation has fallen short of market expectations. In May, the headline CPI grew at a rate of 3.4%, which was lower than the projected 4.0%. Moreover, this figure represents the lowest annual growth rate witnessed in the past two years. While this may initially appear encouraging, a closer look at the core metrics reveals a different story.

According to Benjamin Reitzes from BMO, the short-term core metrics for Canadian inflation present a more concerning picture. The 3-month annualized rate for CPI trim reached 3.8%, and the CPI median remained stagnant at 3.6% in May. These figures suggest that short-term fluctuations are occurring at a faster pace than the average over the past year, potentially leading to a reacceleration of 12-month growth.

The Bank of Canada (BoC) had expressed discomfort with short-term inflation measures hovering between 3.5% and 4.0%. Despite the positive aspects of the May inflation report, it is unlikely to dissuade the BoC from implementing another 25-basis-point (bps) rate hike in July, assuming upcoming data aligns with expectations.


This decision by the central bank comes with a level of uncertainty. Previously, the market anticipated just over one full hike by the end of the year. However, the current scenario suggests that the July hike might barely meet expectations. The BoC faces the challenge of striking the right balance, as raising rates too slowly could fail to moderate demand, resulting in prices simply absorbing the higher costs as the market adjusts.

Canadian inflation has exhibited a mixed performance, with headline CPI growth falling short of expectations while short-term core metrics remain stubbornly high. While this has prompted cautious optimism, experts predict another rate hike by the Bank of Canada in July. The central bank aims to temper inflationary pressures and strike a delicate balance between stimulating economic growth and preventing excessive price increases.

As the coming weeks unfold and more data becomes available, the decision to raise interest rates will depend on various factors, including inflation trends, economic indicators, and market sentiment. It is crucial for policymakers to carefully assess the potential impact of rate hikes on the Canadian economy, keeping in mind the need to maintain stability and support sustainable growth in the long run.

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