Inflation falls further after retailers drop prices upon store reopenings

Inflation moved further into negative territory as Canada’s retail stores began to reopen from the COVID-19 lockdowns with discounts to entice shoppers.

The consumer price index dropped 0.4 per cent from the same month a year earlier, Statistics Canada reported Wednesday from Ottawa. That compares with a 0.2-per-cent drop in April.

Inflation was 2.2 per cent as recently as February. From April, prices rose 0.3 per cent, compared with a forecast of 0.7 per cent.

Provinces across the country began reopening in May and the latest inflation data suggest retailers lowered prices to encourage sales. Prices for women’s clothing fell 3.9 per cent in May from April and footwear prices dropped 2.9 per cent.

“We expect an ongoing shortfall in demand will make for a slow return to the Boc’s 2 per cent inflation target,” Josh Nye, senior economist at RBC Economics, said in a report to investors.

“The upshot is that ongoing monetary policy stimulus will be required to get the economy back to full capacity and inflation back on target.”

Canada’s currency depreciated after the report and was trading 0.2 per cent lower at $1.3565 against its U.S. counterpart at 10:47 a.m. Toronto time. The yield on twoyear government bonds was down one basis point to 0.29 per cent, while the 10-year yield fell two basis points to 0.53 per cent.

Lower prices for furniture, rent and telephone services were also primary contributors to the weaker May reading.

Gasoline prices, a main factor in the lower inflation readings in March and April, picked up in May with higher international demand. Still, compared with a year ago they remain depressed, driving the annual CPI rate lower.

Economists expected annual inflation would be zero per cent in May, according to the median forecast in a Bloomberg survey.

Core inflation readings, often seen as a better measure of underlying price pressure, declined to 1.67 per cent in May, the lowest since December 2017, down from 1.8 per cent in the prior month.