Canadian Inflation Slows to 3.4% in May, Driven by Decreased Gasoline Prices

Statistics Canada reported on Tuesday that Canada’s inflation rate slowed down to 3.4 percent in the year leading up to May, largely due to a significant drop in gasoline prices. This represents a notable deceleration from the 4.4 percent rate observed in April.

The main contributor to the slowdown was the decline in gasoline prices. If we exclude the impact of gasoline, the inflation rate would have remained at 4.4 percent.

Compared to the record highs experienced at this time last year, gasoline prices have dropped by over 18 percent. This decrease alone had a significant effect on dragging down the overall inflation rate. However, beneath this headline slowdown, various aspects of the cost of living are still increasing at a considerable pace.

The cost of groceries, for example, rose by almost nine percent, which is only slightly lower than the 9.1 percent increase recorded in April. This figure remains nearly three times the inflation rate, highlighting the persistent trend of food prices outpacing official inflation rates for over a year.

Furthermore, the cost of housing continues to surge. The mortgage interest cost index recorded a remarkable 29.9 percent increase, the highest on record. This rise is a result of the Bank of Canada’s aggressive rate hikes aimed at cooling demand.

The impact of these rate hikes is particularly evident for individuals with variable rate mortgages, as the cost of servicing these loans has skyrocketed throughout the year. Even fixed-rate loans are being renewed at significantly higher rates than previously paid.

Mortgage costs are the primary factor influencing the inflation rate, according to the data agency. Excluding mortgage costs, the headline inflation rate would have been 2.5 percent, a decrease from April’s 3.7 percent.

Economist Leslie Preston from TD Bank suggests that despite the moderation in goods inflation, the underlying inflation is likely still at a level that would prompt the Bank of Canada to consider at least one more rate hike in the future.

“While cooler goods inflation is welcome, the Bank of Canada has likely already factored that into their considerations as supply chain disruptions ease,” Preston stated. “Although Canadian inflation continued to cool in May, it is unlikely that the progress made will be sufficient to deter the Bank of Canada from raising rates in July.”