Inflation accelerated in May by 2.9 per cent on a year-over-year basis, according to Statistics Canada, which will surprise economists who were expecting it to ease from the 2.7 per cent increase in April.

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Services costs were the biggest contributor to the uptick in the consumer price index (CPI), with prices rising 4.6 per cent last month, following a 4.2 per cent increase in the month of April, driven mainly by faster price growth in cellphone services, travel tours, rent and air transportation.

Grocery prices slightly rose by 1.5 per cent year over year, up from the 1.4 per cent increase in April, and showed their first acceleration since June 2023. Grocery prices also rose on a month-over-month basis by 1.1 per cent, primarily due to price increases for fresh vegetables, meat, fresh fruit and non-alcoholic beverages.

Shelter prices also accelerated on a monthly basis, rising by 0.4 per cent in May from April. On a year-over-year basis, they rose 6.4 per cent. Mortgage interest costs remain the No. 1 contributor to inflation, rising 23.3 per cent year over year, followed by rent at 8.9 per cent.

Prior to Tuesday’s release, economists predicted inflation would ease last month, leaving room for multiple rate cuts by the Bank of Canada this year. The latest data may curb those expectations.

“Canadian central bankers said they wanted to see more of the same, but that’s not what they got in today’s inflation numbers,” Jimmy Jean, chief economist at Desjardins Group, said. “In contrast to expectations for a muted 0.3 per cent increase, headline prices rose 0.6 per cent in May.”

Measures of core inflation, which is the data Bank of Canada policymakers prefer to look at when making monetary decisions because they filter out extreme price changes, had slight increases. CPI-trim rose by 2.9 per cent year over year in May, compared with 2.8 per cent in April. CPI-median also had a slight increase of 2.8 per cent last month, up from 2.6 per cent in April.

“Overall, with the data showing much faster price pressures than expected, this casts a lot of doubt on the possibility of a July cut,” said Katherine Judge, an economist with CIBC Capital Markets, in a note after the data.

Jean said the market is now pricing a 40 per cent chance of a rate cut next month, down from 60 per cent before the new inflation data was released.

“This CPI report is not a death knell for a July rate cut,” Jules Boudreau, a senior economist at Mackenzie Investments, said. “Cutting rates at a steady pace is necessary to jumpstart an ailing Canadian economy that is underperforming all its global peers.”

Gross domestic product data for April will be released by Statistics Canada on Friday and the latest unemployment data is expected next week. Policmakers will be watching these numbers before making their next rate decision on July 24.

“Governor Macklem may want to hold off on the soft-landing claim, at least for now as the (Bank of Canada) will likely wait to see how the economy progresses and pause at their next meeting,” Andrew DiCapua, a senior economist at the Canadian Chamber of Commerce, said in a note. “Governing council continues to be heavily data dependent, and this reversal will support their restrictive bias.”

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