Canadian Inflation Update
Canadian inflation is showing signs of cooling down, but it’s still not low enough for the central bank to consider further rate cuts. According to Statistics Canada, the headline consumer price index (CPI) remained flat in May. This might seem like good news, but there are concerns that inflation could pick up again due to rising risks.
Understanding the Numbers
The CPI annual growth rate was 1.7% in May, which is unchanged from April. However, this number is influenced by energy policy changes, particularly the removal of the carbon tax. When you exclude energy from the equation, the CPI was 2.7% in May, slightly lower than the 2.9% reported in April. This is still higher than the Bank of Canada’s target rate and only 0.3 points below its upper limit of tolerance.
Components of Inflation
Nearly half (48%) of the CPI components showed price growth above the 3.0% target in May. This is an improvement from the start of the year but a step back from April. The reduction in energy prices, mainly due to the elimination of the consumer carbon tax, has been weighing down the headline inflation. However, gas prices still increased by 1.9% from April to May, indicating that the downward pressure might not last.
The Bank of Canada’s Perspective
The Bank of Canada’s preferred measure of inflation, the core CPI, showed some signs of moderating. It was 3% higher than last year, down from 3.4% in April. The central bank is likely to wait for a persistent reduction below the threshold before making any significant changes. The core CPI provides a clearer view of total inflation movement by excluding volatile components and tax effects.
Implications for Interest Rates
Given the current state of inflation and the potential for it to accelerate again, RBC believes that the central bank’s easing cycle is over. Further rate cuts would need to be justified by a weaker economy and clearer signs of deceleration. The Bank of Canada appears to have reached the end of its cutting cycle, with the policy rate now in the middle of the neutral range. While the door is left open for further easing, it would likely depend on clearer signs of economic weakness alongside contained inflation.
Conclusion
In conclusion, Canadian inflation might be cooling down, but it’s still a concern for the central bank. With nearly half of the CPI components showing price growth above the target rate and the potential for inflation to pick up again, the Bank of Canada is likely to maintain its current stance on interest rates. The economy and inflation will need to show clearer signs of weakness and deceleration before any further rate cuts are considered.
