After a brief uptick in April, inflation slowed in May due to lower gasoline prices and base-year effects, easing pressure on the Bank of Canada as it attempts to bring price growth back to its two-per-cent target.

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The consumer price index (CPI) rose 3.4 per cent in May year over year, as prices at the pump dropped 18.3 per cent, Statistics Canada said on June 27. Excluding gasoline prices, the CPI increased 4.4 per cent, following a 4.9 increase in April.

On a monthly basis, the CPI rose 0.4 per cent in May, following a 0.7 per cent gain in April. Seasonally adjusted, prices increased 0.1 per cent last month.

“The largest contributors to the month-over-month increase were mortgage interest costs and travel services, which includes traveller accommodation and travel tours,” the agency said.

Base-year impacts also played a role because there was a steep run-up in prices in the first half of 2022, which was pushed by Russia’s invasion of Ukraine. In May 2022, the CPI increased 7.7 per cent from the previous year and inflation peaked in June 2022 at 8.1 per cent.

A base-year effect refers to the impact on price growth in a given month compared to price movements from 12 months earlier. The current month’s headline inflation number experiences a downward effect when the base month had a large upward price change, Statistics Canada said.

This month’s inflation report was “pivotal” for the Bank of Canada, said Jules Boudreau, senior economist at Mackenzie Investments.

“It is very possible in my sense that the bank holds in July,” he said. “Rates are pretty restrictive now and … the last rate hike that we had in June will have a big effect in our view.”

The central bank hiked interest rates at the fastest pace on record to try to bring high inflation back within its target zone of one to three per cent. In its April Monetary Policy Report, the Bank of Canada said it expects inflation to be around three per cent this summer, but that it will take until the end of 2024 before it returns to two per cent.

In May, grocery prices rose nine per cent over the year, nearly unchanged from April’s reading of 9.1 per cent, and more than double the headline rate. Restaurant food prices jumped 6.8 per cent, from 6.4 per cent in April, due to ongoing labour shortages, rising input costs and expenses.

The prices of some products and services declined. Consumers paid 8.2 per cent less than a year ago for cellular services in May due to lower-priced cellular data plans. It’s the largest year-over-year decline since April 2022. And furniture prices fell 2.9 per cent, the largest amount since June 2020, because supply chains are loosening.

On a monthly basis, the mortgage interest cost index ticked up 1.8 per cent while traveller accommodation rose 15.6 per cent. But the yearly mortgage interest cost index increased to 29.9 per cent, the third consecutive month the index has risen to a new record high as Canadians continue to initiate and renew mortgages at higher interest rates.

That may catch the attention of the Bank of Canada, which will also have April gross domestic product data and the central bank’s Business Outlook Survey on hand when it heads into its next policy meeting on July 12.

Governor Tiff Macklem resumed hiking interest rates at the beginning of June because Governing Council determined interest rates weren’t restrictive enough to bring supply and demand back in balance. The Bank of Canada raised interest rates on June 7 by 25 basis points, bringing the overnight policy rate to 4.75 per cent.

The central bank’s preferred inflation measures, CPI-trim and CPI-median, proved stickier than the headline and were up 3.8 per cent and 3.9 per cent, respectively, but slowed from the previous month when both metrics topped four per cent.

Statistics Canada completed its regular reweighting of basket sizes for the May print, which could have caused core inflation to come in higher than expected, said Stephen Brown, deputy chief North America economist at Capital Economics, said.

“With the labour market also loosening in May, the case for another rate hike in July is not quite as strong as it seemed a few weeks ago,” he said in a note to clients. “Nonetheless, with even the one-month annualized CPI-trim and CPI-median inflation rates still above two per cent, and the housing market heating up, we still judge that another hike is more likely than not.”

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