Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation was unchanged at 1.7% in May, in line with expectations, while the Bank of Canada’s preferred measures of core inflation eased to 3.0%, at the upper band of the inflation target, from 3.1% on April.
The breadth of inflationary pressures eased marginally in May. The share of components of CPI rising by more than 5% remained unchanged at 19%, while the share of components increasing by more than 3% eased to 37% from 39%. We note that the share of components increasing by more than 3% remains well above historical norms (see Fig. 1) and higher than during periods when inflation is at target, suggesting some stickiness and broad in inflationary pressures.
The recent trend in CPI’s monthly changes suggests that the momentum in inflationary pressures eased further in May. As such, the 3-month annualized changes of many CPI components are below 3% (see Fig. 2), with the 3-month annualized change in headline CPI at -0.2%, mainly due to the removal of the Carbon Tax in April.
The momentum of BoC’s core measures eased to 3.0% in May from 3.4%, remaining at the upper end of the inflation target (see Fig 2). The measure has been at or above 3% for 7 of the 8 previous months. This suggests some stickiness in the core measures and that price pressures have been mostly above target over the past eight months.
We would also note that the momentum in goods prices remains sharply negative, at -5.7%, due to the removal of the Carbon Tax, but the momentum for services remains 3%. The strong momentum in service prices is another sign of elevated and sticky inflationary pressures.
Overall, the report suggests that headline inflation remains low and that underlying inflationary pressures eased marginally. However, it is unlikely to be sufficient to alleviate the BoC’s concerns regarding inflation. The BoC is currently placing more emphasis on current inflation than on the amount of slack in the economy. With this in mind, we will need to see further easing in inflation, especially in core, for the BoC to consider cutting its policy rate. There is another CPI release before the July meeting and further easing in inflation could open the door to a rate cut.
In Alberta, inflation rose to 1.7% in May, pushed higher by an increase in shelter costs (+3.1% y-o-y), while lower energy costs, due to the removal of the Carbon Tax, continued to be a drag on inflation. Inflation excluding food and energy (a core inflation measure) eased marginally to 2.9%, remaining amongst provinces.
The Consumer Price Index (CPI) increased 0.6% m-o-m non-seasonally-adjusted in May and the inflation rate remained unchanged at 1.7%. A rise in prices for travel services , motor vehicles and gasoline were the main source of increase in May.
a smaller price increase for rent and a decline in travel tours put downward pressure on the CPI in May. Smaller declines for gas and cellular services put upward pressure on the index compared with the previous month.
On a year-on-year basis, five of the eight major CPI components decelerated in May. Transportation costs were a smaller drag on inflation, with prices 1.3% y-o-y lower compared to -1.9% in April. Transportation costs reduced inflation by 0.2 percentage points (pp) in May, with gasoline accounting for a 0.5pp reduction.
Shelter cost inflation eased to 3.0%, its lowest since March 2021, and remains the main source of inflation, contributing 0.9pp to headline inflation, mainly due to higher rent (contributing 0.3pp) and mortgage interest costs (contributing 0.3pp).
Food price inflation eased to 3.4% y-o-y, adding 0.6pp to inflation. Some impact from the US tariffs, the wave of uncertainty and counter tariffs are likely pushing some prices higher.
In May, goods price inflation eased to -0.1% and service price inflation decreased to 3.2%. Energy prices were lower by 11.0% y-o-y compared to the same month last year, as the removal of the Carbon Tax in April means lower energy prices levels. Excluding food and energy, prices rose 0.6% m-o-m in May and unchanged at 2.6% 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, remained at 2.6%.
Looking at the BoC’s core measures of inflation, they eased in May and remained at the upper end of the BoC’s inflation target. CPI-Trim was 3.0%, after 3.1% in April, while CPI-Median eased to 3.0% from 3.1%. As a result, the average of the two measures decreased marginally to 3.0%, above 3% target.
By provinces, headline inflation was the highest in BC (+2.3%), Manitoba (+1.9%), Alberta (+1.7%), Quebec (+1.7%), and Ontario (+1.7% y-o-y), while it was the lowest in Newfoundland (+0.5%), PEI (+0.7%), and New Brunswick (+0.9%).
Core inflation, or CPI excluding food and energy, with the highest in BC (+3.0%), Nova Scotia (+2.8%), Alberta (+2.8%). It was the lowest in Newfoundland (+1.1%), PEI (+1.7%), and New Brunswick (+2.2%).
In Alberta, prices increased 0.5% m-o-m and inflation rose to 1.7% in May. Only three out of eight CPI components decelerated on the month. Transportation costs eased -2.0% y-o-y in May, after decreasing 2.2% y-o-y in April, and was the main source of drag on inflation, reducing headline inflation by 0.3 percentage points. This was the result of 15.4% y-o-y drop in gasoline price prices in May, due to the removal of the Carbon Tax in April.
Shelter costs accelerated to 3.1% y-o-y, from 2.5% y-o-y in April, contributing 0.8pp to inflation. The increasing pace of shelter cost inflation was due to the increase in rented accommodations (3.3% y-o-y) and rent cost (3.4% y-o-y). A big increase in insurance costs (+11.9% y-o-y) was a major contributor to higher owned accommodation costs.
Food prices inflation eased to 3.3% y-o-y from 3.5% y-o-y, contributing 0.6pp to inflation. As seen nationally, some impact from the US tariffs, the wave of uncertainty and counter tariffs are likely pushing some prices higher.
Goods price inflation was -0.2% y-o-y in May after -0.7% y-o-y. Services price inflation declined to 3.3% y-o-y from 3.5% y-o-y in April. Inflation excluding food and energy decelerated to 2.8%, one of the highest amongst provinces. Energy costs eased to -13.7% y-o-y compared to -17.0% y-o-y in April.
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Independent Opinion
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