Core inflation rate at highest point since ’12
Canadian inflation quickened in May on increases across the board, giving the Bank of Canada plenty of scope to hold interest rates steady.
The consumer price index jumped 2.4 per cent from a year earlier, compared with two per cent in April and versus a median economist forecast of 2.1 per cent, Statistics Canada said Wednesday from Ottawa.
It was the highest annual rate since October, boosted by increases in food and durable goods prices. Core inflation, a better gauge of underlying price pressures and one that’s closely watched by policy-makers, rose to the highest since 2012.
Firmer inflation gives the Bank of Canada reason to question the need for interest rate cuts, and provides ammunition to resist any easing trend in other advanced economies like the U.S. and euro area, where price gains have been more tepid. The Canadian dollar jumped on the report.
The stronger inflation numbers “are one reason the Bank of Canada faces less pressure to reverse course and begin easing monetary policy,” Josh Nye, a senior economist at Royal Bank of Canada, said in a note to investors.
The loonie appreciated as much as 0.3 per cent against the U.S. dollar. It traded at an average of US74.95 cents, up from US74.66 cents on Tuesday. Yields on government two-year bonds climbed five basis points to 1.46 per cent.
Whether the Bank of Canada will be forced to match — at least in part — future rate cuts by the Federal Reserve is one of the biggest questions for investors.
Markets are still pricing in at least one quarter-point cut in Canada over the next 12 months, amid concern that trade tensions between the U.S. and China will slow the global economy.
The Fed left its key rate in a range of 2.25 per cent to 2.5 per cent on Wednesday. They dropped a reference in their statement to being “patient” on borrowing costs and forecast a larger miss of their twoper-cent inflation target this year.
Dampening expectations for lower borrowing costs in Canada is the fact that the policy rate in the country — at 1.75 per cent — is below the Fed rate.
The Canadian economy is also accelerating in the second quarter after a weak start to 2019, while growth is slowing in the U.S. after a strong start. And inflation dynamics seem to be stronger in Canada.
The average of the three key measures of core inflation rose to 2.1 per cent in May, breaching the two-percent threshold for the first time since February 2012. The inflation numbers are above what the central bank has been estimating.
On a monthly basis, the CPI increase was 0.4 per cent, matching April’s pace and topping the 0.1 per cent median forecast.
The largest upside contributor to CPI on an annual basis was shelter costs, which rose 2.7 per cent.
Food and transportation were also major drivers.
Excluding gasoline, inflation climbed 2.7 per cent on the year.
(Stronger numbers) are one reason the Bank of Canada faces less pressure to reverse course.