Thunder Bay – Business – In a report released by Statistics Canada the agency is confirming that inflation in May measured at 3.4% year over year (y/y), a decrease of one percentage point from April.
While the average business owner and consumer might not feel that one per cent decrease this matches economists’ predictions, marking the smallest inflation increase since June 2021.
The drop aligns with the Bank of Canada’s forecast that inflation will decrease to around 3% this summer.
Last May, inflation had already seen a significant rise to 7.7% y/y, fuelled primarily by the surge in energy prices due to the Russian invasion of Ukraine.
Inflation peaked at 8.1% in June of last year, suggesting a continuation of low inflation rates in the coming month.
The process of reducing inflation to 3% will likely be simpler than bringing it down from 3% to 2%. Many service prices are more resistant to change than commodity prices and durable goods, which have already seen significant reductions.
The decrease in May inflation was largely driven by an 18.3% y/y drop in gasoline prices, a consequence of the base-year effect. Excluding gasoline, the Consumer Price Index (CPI) increased 4.4% in May, down from a 4.9% increase in April. The deceleration of energy prices was also aided by a 3.5% drop in natural gas prices.
Durable goods prices grew at a slower pace y/y in May, rising by only 1.0% after a 2.2% increase in April. This is the smallest increase since May 2020, and it coincides with an easing of supply chain pressures. This has resulted in a notable drop in furniture prices (-2.9%) and a modest increase in passenger vehicle prices (+3.2%).
Grocery Prices Remain High
Grocery prices remain high, with a 9.0% y/y increase, slightly down from April. Meanwhile, prices for food purchased from restaurants have seen a slight uptick, from a 6.4% increase in April to a 6.8% increase in May, likely due to ongoing labour shortages, increased input costs, and other expenses.
There has been both inflation in prices, especially at the grocery stores that has in some cases been coupled with “Shrinkflation” where the product size decreases in weight or volume, while the price either has increased or remained the same. The end result is a higher price for consumers.
Inflation is also being influenced by rising interest rates, as mortgage costs, which constitute just over 3% of the CPI, are a significant component of the shelter index. This index, which represents nearly 30% of the CPI, saw mortgage interest costs rise by a record-breaking 29.9% in May.
Given the lag in the impact of interest rate hikes on the CPI, it is expected that mortgage interest costs will continue to rise as higher rates gradually affect household mortgage payments. Additionally, expenses related to home buying have increased in May, with higher home resale prices contributing to increased realtor and broker commissions.
Meeting the 2% inflation target will require substantial effort. The Bank of Canada has expressed concerns about the Canadian economy’s overheated state. Despite a recent increase in unemployment relative to job vacancies, the Bank is concerned that ongoing excess demand will continue to drive prices up.
This cyclical component of inflation, known as ‘supercore’ inflation by the Fed, includes household services like haircuts, personal care, babysitting, restaurant meals, and entertainment. Supercore inflation stands at approximately 5.5% y/y, compared to the CPI-trim at 3.8% and the CPI-median at 3.9%.
Statistics Canada is set to release two more significant reports before the Bank of Canada’s decision on July 12th: the monthly GDP number for April on June 30th and the Labour Force Survey on July 7th. Unless these reports indicate a substantial economic slowdown or an increase in unemployment, the likelihood of another rate hike by the Bank of Canada stands at approximately 60%.