Bank of Canada awaits stronger signals as CPI stays at 1.7%
Canada’s annual inflation rate remained unchanged at 1.7% in May, according to Statistics Canada data released Tuesday. While aligned with economist forecasts, the muted figure may not be enough to justify a Bank of Canada rate cut in July without stronger disinflationary evidence in coming weeks.
“Not bad, but should do better to convince the Bank to trim rates,” wrote BMO chief economist Doug Porter. The central bank’s next move, due July 30, hinges on forthcoming data including retail sales, employment, and updated consumer and business sentiment surveys.
Key components of the Consumer Price Index (CPI) pointed to mixed inflation signals. Shelter costs rose 3% year-over-year, slightly below April’s 3.4%, while rent inflation cooled to 4.5% from 5.2%, with Ontario seeing the sharpest deceleration. The drop was attributed to a rise in rental availability and slower population growth in the province.
Energy and Housing Prices Ease, but Tariff Effects Loom
Energy prices fell for another month, led by a 15.5% drop in gasoline prices, aided by the federal government’s carbon tax removal and weaker oil benchmarks. Meanwhile, the mortgage interest cost index declined for the 21st consecutive month, signaling relief for homeowners.
Airfares dropped 10.1%, while new vehicle prices climbed 4.9%, suggesting early effects from cross-border tariffs. RBC’s Abbey Xu and CIBC’s Katherine Judge expect tariffs to weigh more heavily on future CPI readings, though Judge notes that waning demand, a rising unemployment rate, and a stronger Canadian dollar could soften that impact.
“Inflation is clearly continuing to moderate,” said Karl Schamotta of Corpay. “While July remains on the table, a cut in October now looks more likely unless incoming data changes the outlook.”
Core Inflation Trends Offer Mixed Clarity
StatCan’s core inflation indicators—CPI-trim and CPI-median—both eased to 3.0% in May from 3.1% in April. Judge called the decline “a step in the right direction,” but stressed that the BoC will want to see this trend hold through the next data cycle before easing rates.
Desjardins’ Randall Bartlett was more optimistic, describing the May inflation print as “good all around.” He believes the figures will reinforce the Bank’s confidence that earlier core inflation acceleration was temporary and could pave the way for a July rate cut.
U.S. Policy Adds External Pressure
Meanwhile, U.S. Federal Reserve Chair Jerome Powell told lawmakers on Tuesday that the Fed is “well positioned to wait” for more clarity on the inflationary impact of President Donald Trump’s ongoing tariff strategy. The Fed has not adjusted rates since its last cut in December 2024.