Sat. Jul 13th, 2024

Canada’s Inflation Surges in May, Jeopardizing July Rate Cut

Canada’s annual inflation rate unexpectedly accelerated to 2.9 per cent in May, with core inflation measures also rising, according to Statistics Canada. This development reduces the likelihood of a Bank of Canada rate cut in July.

Analysts had anticipated a cooling of inflation to 2.6 per cent from 2.7 per cent in April, as per a Reuters survey. However, Statistics Canada reported that higher prices for services, which increased by 4.6 per cent in May compared to 4.2 per cent in April, were the primary drivers of the inflation spike. Notable contributors included cellular services, travel tours, rent, and air transportation.

The Bank of Canada’s key measures of core inflation also rose in May, surprising analysts. CPI-median increased from 2.6 per cent in April to 2.8 per cent in May, while CPI-trim went up from 2.8 per cent in April to 2.9 per cent in May. Economists had expected CPI-median to remain at 2.6 per cent and CPI-trim at 2.8 per cent.

The unexpected rise in inflation led money markets to reduce the likelihood of a rate cut in the Bank of Canada’s next decision on July 24, dropping the odds to about 45 per cent from over 70 per cent on Monday, according to Reuters.

Earlier this month, the Bank of Canada cut its benchmark interest rate for the first time in four years, lowering it to 4.75 per cent after expressing confidence that inflation was moving closer to its two per cent target. On Monday, Governor Tiff Macklem reiterated that further cuts could be expected if inflation continues to ease but emphasized that each interest rate decision would be made “one meeting at a time.”

While a rate cut in July remains uncertain, the latest inflation figures suggest the central bank may need to reassess its monetary policy strategy.

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