Food prices saw smaller increases in May, as did rent and mortgage interest. Economists have feared that the U.S. trade war would drive up prices, but so far tariffs haven't had much of an impact.Sean Kilpatrick/The Canadian Press
Inflation in Canada held steady in May while underlying price pressures eased slightly, potentially allaying concerns at the Bank of Canada about an acceleration in core inflation caused by the trade war with the United States.
The consumer price index rose at an annual rate of 1.7 per cent last month, Statistics Canada reported on Tuesday. This was the same as in April and in line with Bay Street forecasts.
Rent, food prices and mortgage interest costs all saw smaller increases in May compared with the prior month. Gasoline prices were also sharply lower year-over-year as a result of the removal of the carbon tax in April, although gas prices increased month-to-month.
Importantly for the Bank of Canada, gauges of underlying price pressures retreated slightly, with the central bank’s two preferred measures of core inflation both falling to 3 per cent from 3.1 per cent the prior month.
The bank has been concerned about the upward march in core inflation in recent months, which was a key reason it held its policy interest rate steady at 2.75 per cent for the past two rate decisions.
Despite the relatively benign inflation reading, financial markets trimmed their bets on another rate cut at the next Bank of Canada rate decision on July 30.
Interest rate swap markets now put the odds of a quarter-point cut at around 32 per cent, down from around 38 per cent before the inflation report, according to LSEG data. Markets are pricing in only one more cut from the central bank before the end of the year.
“The latest inflation results are broadly similar to April’s outing – a deceptively calm headline number with core hovering too far above the 2 per cent target for comfort,” Bank of Montreal chief economist Douglas Porter wrote in a note to clients.
“The BoC will likely need to see much more improvement before it’s convinced that underlying inflation is headed back to 2 per cent.”
Policymakers have been watching inflation data for signs of the impact of the trade war with the United States. In response to U.S. tariffs, Canada placed its own countertariffs on a range of U.S. imports, which may be passed along to Canadian consumers in the form of higher prices.
There are signs that tariffs are raising prices for some traded goods.
The price of sports equipment, for instance, was up 5.6 per cent year-over-year while new vehicle prices were up 4.9 per cent. Grocery prices have also jumped in recent months, although the annual increase was smaller in May than in April, rising 3.3 per cent compared with 3.8 per cent.
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So far, however, tariffs haven’t had as much of an impact on prices in Canada or the United States as some economists feared, possibly because companies are still working through stockpiles of imported goods that were rushed across the border to get ahead of tariffs.
“While higher auto prices in May could in part reflect initial tariff pass-through, there were few signs of upward pressure on overall inflation from tariffs last month,” Michael Davenport, senior economist at Oxford Economics, wrote in a note to clients.
“We expect temporary Canadian countertariff remissions to limit the upward pressure on prices from the trade war until the relief for non-auto imports ends in mid-October. The removal of the consumer carbon tax will also continue to hold down year-over-year headline inflation for the next year,” he said.
Shelter inflation slowed notably in May, with overall prices rising 3 per cent year-over-year compared to 3.4 per cent in April.
Much of the slowdown was driven by rent, which rose 4.5 per cent on an annual basis in May compared with 5.2 per cent in April, with the biggest slowdown happening in Ontario.
“The increased availability of rental units, coupled with slower population growth compared with spring of the previous year, contributed to the slowdown in rent price growth in May,” Statistics Canada said.
“Given the large weight of Ontario nationally, these effects alone were enough to offset faster price growth in seven other provinces.”
There was also a notable drop in travel tour prices, which fell 0.2 per cent in May after rising 6.7 per cent in April. Air fares decreased 10.1 per cent on an annual basis in May.
Cellular services dropped 5.5 per cent in May compared to the previous year, but were up 7.2 per cent month-to-month. Statscan said the monthly increase followed the end of promotions from some wireless service providers.
Looking ahead, the path of inflation remains hazy given the economic cross-currents created by the trade war with the United States.
Tariffs push up prices in the near-term, but they also slow down economic activity and increase unemployment, which weighs on inflation over time.
Economists are watching other economic data, including the April GDP numbers which will be published Friday, to see how much Canada’s economy is slowing down in response to U.S. tariffs on steel, aluminum, automobiles and other goods that don’t comply with the continental free-trade agreement’s rules of origin.