Morning Market Brief: June 26, 2024

Canadian inflation accelerates in May?

Statistics Canada reports that Canada’s inflation rate picked up in May. This reinforces comments from the Bank of Canada (BoC) that inflation remains a risk to Canada’s economy and there might not be a smooth path to reach the bank’s 2% target. The data suggests the BoC may wait a bit longer before cutting interest rates again.?

• Canada’s annual inflation rate was 2.9% in May, up from the 2.7% year-over-year rate in April. The result surprised economists. A Bloomberg survey of economists expected Canada’s inflation rate to fall to 2.6% in May.
• Several categories contributed to the increase in prices in May. The growth in the price of food was a major contributor, as it rose by 2.4% year-over-year in May compared to 2.3% in April. Prices for health care and recreation also increased in May.
• Gasoline prices remained elevated in May, rising by 5.6% year-over-year. Oil prices have moved higher over 2024 and there is a risk they may push inflation higher in the upcoming months, particularly as geopolitical tensions persist.
• Price pressures were largely broad-based. Core inflation, which excludes more volatile items, also increased in May. Neither food nor energy alone pushed inflation higher.?
• Attention now turns to the BoC which will make its next interest rate announcement on July 24. The BoC might not be in a rush to cut interest rates again, given the presence of still-elevated inflationary pressures. The BoC seeks to get inflation back to its 2% target.

The BoC expected inflation to run close to 3% over the first half of 2024 and that appears to be largely correct. Despite lowering rates in June, inflation is up, meaning Canadian households and businesses are still facing tight financial conditions, which could continue to impact their spending and investment decisions. Financial markets could be volatile as investors try to predict what the economic data means for the BoC’s upcoming rate decisions.

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