Canadian inflation is showing some encouraging signs, but the devil’s in the details. Statistics Canada (Stat Can) reported the growth rate for the Consumer Price Index (CPI) saw annual growth fall much lower than the market had forecast for May. BMO saw that as encouraging, but warns short-term growth isn’t budging, and that will reinforce the need for another rate hike in the coming weeks.
Canadian Inflation Came In Much Lower Than Expected
Canadian inflation showed some encouraging signs, following one of the sharpest rate moves in history. Headline CPI came in at 3.4% in May, lower than the 4.0% expected by the market. It was also the lowest annual growth rate in the past two years.
“Unfortunately, the short-term core metrics weren’t quite as encouraging,” warned Benjamin Reitzes, Canadian rates & macro strategist at BMO.
The 3-month annualized rate for CPI trim came in at 3.8%, while CPI median remained flat at 3.6% in May. This implies the short-term moves are more rapid than the average over the past year. If it persists, a reacceleration of 12-month growth can occur.
Not Enough To Stop Interest Rates From Rising Further
The short-term stubbornness is exactly what the Bank of Canada (BoC) didn’t want to see. “The Bank of Canada’s June policy statement highlighted that it wasn’t comfortable with those short-term measures holding in the 3.5%-to-4% range,” said Reitzes.
“While there was some good news in the May inflation report, it likely wasn’t enough to keep the BoC from hiking another 25 bps in July, assuming the rest of the data over the next two weeks holds up.”
An important point worth considering is this might indicate tempering expectations. Earlier this month, the market was anticipating a little over one full hike by year end. At this moment, it sounds like the July hike may just squeeze by. It’s a gamble for the central bank, since raising rates too slowly won’t taper demand. Prices tend to just absorb the higher costs if the market has time to adjust.