Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation accelerated to 2.9% in May, stronger than expectations and reversing the progress made in April. The acceleration was fairly broad-based and led by less drag from lower prices for mobile phones and internet plans, higher rents and travel services costs. The Bank of Canada’s core inflation measures also increased in May but remained below 3% (the upper band of the inflation target).
In addition, inflationary pressures broadened slightly in May, with 16% of the components of CPI rising at more than 5%, compared to 13% in April. Similarly, the share of components increasing by more than 3% rose to 35% from 34% (see Fig 1.). The increase in these measures suggests that many CPI components accelerated in May, further broadening inflationary pressures. Nevertheless, both measures remained close to their historical norms.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures increased slightly in May. As such, we observe that many of the 3-month annualized changes in five of the eight main CPI components remained above 3% (see Fig. 2). The 3-month annualized changes in headline CPI is now at 3.0 %, after 2.3% in April.
The momentum of BoC’s core measures was 2.5% on average. This is the fourth consecutive month that the momentum in the BoC’s core measure of inflation is at or below 2.5% (see Fig 2). The inflation momentum suggests that the underlying inflation dynamic remains consistent with the BoC’s target.
Today’s report will be a disappointment for the Bank of Canada. While headline and core inflation remained within the BoC’s inflation target band (i.e. below 3%), rising momentum in many components and an increase in the breadth of the inflationary pressures are likely to be considered a setback. Overall, the lack of progress on inflation in May reduces the likelihood that the BoC will cut in July. However, with another CPI release before the July decision, the door is not be completely closed to a cut if the May surprise proves to be temporary.
In Alberta, inflation remained unchanged at 3.0% in May. An acceleration in transportation cost offset a deceleration in utility prices, especially electricity, and rent. As a result, shelter costs decelerated to 8.0% y-o-y, contributing 2.2pp to inflation. Food prices also decelerated and remained one of the main sources of inflation, adding 0.5pp to headline inflation. Inflation excluding food and energy (a core inflation measure) increased to 3.0%, its highest since July 2023.
The Consumer Price Index (CPI) rose 0.6% non-seasonally-adjusted in Mayl and the inflation rate rose to 2.9%. This was higher than expectations. The increase in prices in May was mainly the result of higher travel services (+11.9% m-o-m), which contributed 0.2 percentage points to the rise in CPI. The rest of the monthly increase can be attributed to higher food prices (+0.9% m-o-m, contributing 0.1pp) and shelter costs, especially rent (+0.4% m-o-m, contributing 0.1pp). Lower gasoline prices were the main drag in May, reducing the monthly increase by a meagre 0.1pp.
Five of the eight major CPI components accelerated in May on a year-on-year basis. Shelter cost inflation remained unchanged at 6.4% and was the main source of inflation, contributing 1.9pp to headline inflation, mainly due to higher rent (contributing 0.6pp) and mortgage interest costs (contributing 1.2pp).
Transportation costs accelerated to 3.5% from 3.1%, contributing 0.6pp, due to higher gasoline prices (+5.6% y-o-y), insurance premiums and repair costs compared to last year.
Food price inflation accelerated slightly to 2.4%, still low compared to its level over the past 3 years, contributing 0.4pp to inflation. Recreation, education and reading increase to 1.3% y-o-y, due to higher travel service costs (+4.4% y-o-y).
Household operations, furnishing and equipment had a smaller drag on inflation than in April, with the component declining by -1.5% y-o-y and reduced headline inflation by 0.2pp. The smaller drag was due to a smaller decline in the communication component as the decline in prices from last year are dropped from the calculation.
In May, goods price inflation was unchanged at 1.0%, while service price inflation increased to 4.6%, its highest since October 2023. Energy prices are 4.1% higher compared to the same month last year, after increasing 4.5% y-o-y in April. Excluding food and energy, prices increased 0.6% on the month and increased by 2.9% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, rose to 1.8%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they were all higher in May. CPI-Trim edged higher to 2.9% from 2.8%, while CPI-Median increased to 2.8% from 2.6%. As a result, the average of the two measures inched higher to 2.85% but remained below 3%.
In Alberta, inflation was unchanged at 3.0% in May. Five out of eight CPI components decelerated on the month. Shelter costs decelerated, increasing 8.0% y-o-y compared to 8.5% y-o-y in April. Nevertheless, it remains the main source of inflation, contributing 2.2 percentage points to inflation. The easing in shelter costs was due to slower increases in utility costs compared to last year, especially electricity (-11.4% y-o-y in May vs +5.3% y-o-y in April). Similarly, rent costs decelerated slightly to 15.7% y-o-y (contributing about 0.9pp to inflation) and are rising faster than in any other province.
Food prices decelerated to 2.7% y-o-y and remained an important source of inflation in the province, contributing 0.5pp. Transportation costs accelerated to 3.4% compared to last year, despite a small deceleration in gasoline prices. The component contributed 0.6pp to inflation in April.
Household operation, furnishing and equipment costs were a drag on inflation than in May, declining 2.7% y-o-y. As a result, the sector reduced inflation by 0.4pp. Similarly, clothing and footwear prices fell 3.1% y-o-y, reducing inflation by 0.2pp.
Goods prices inflation eased to 0.7% y-o-y from 1.6% y-o-y, while services prices accelerated to 5.3% y-o-y, the strongest since January 2023. Inflation excluding food and energy increased to 3.0%, its highest since July 2023, while energy costs eased to 3.2% y-o-y.
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Independent Opinion
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