23 Jun

Canadian Inflation Rose to 3.2% in May as Core Inflation Remained Subdued

General

Posted by: Jen Lowe

Canadian Inflation Rose to 3.2% in May as Core Inflation Remained Subdued
Higher gasoline prices pushed Canadian inflation to a more than two-year high, while underlying inflation pressures showed little sign of accelerating, with core measures broadly unchanged and price gains less broad-based.

Canada’s annual inflation rate rose to 3.2% in May, Statistics Canada reported Monday, marking its highest level since December 2023. The increase exceeded economists’ expectations, with Bloomberg’s survey consensus forecasting a 3.0% gain, up from 2.8% in April. On a monthly basis, consumer prices climbed 1.0%, also coming in above forecasts.

Despite the headline surprise, measures of underlying inflation suggest price pressures remain relatively contained as the economy continues to adjust to slower population growth and the adverse effects of U.S. trade policies on exports.

Excluding food and energy, inflation accelerated to 1.6% year-over-year, while the consumer price index excluding gasoline increased 2.2%. The average of the Bank of Canada’s preferred core inflation measures—the trim and median indexes—held steady at 2.1%. However, on a three-month annualized basis, both gauges picked up sharply to 2.3%, indicating some recent firming in underlying inflation trends.

Financial markets initially interpreted the report as supportive of tighter monetary policy. The Canadian dollar strengthened briefly before reversing course, trading at US$0.7062 per Canadian dollar. Meanwhile, the two-year Government of Canada bond yield rose roughly two basis points to 2.79%. Overnight index swaps continue to price in nearly one quarter-point Bank of Canada rate increase by year-end.

The conflict in the Middle East continued to drive higher energy costs in May, with gasoline prices rising 33% from a year earlier, according to Statistics Canada. Air transportation prices also surged, increasing 7.4% after falling 1.7% in April. Airlines are experiencing higher operational costs, notably for jet fuel.

Since then, easing tensions between the United States and Iran has helped push oil prices lower, with Canadian gasoline prices retreating to their lowest levels since mid-March. If sustained, the decline should provide some relief to consumers and help moderate headline inflation in the months ahead. Earlier this month, Bank of Canada Governor Tiff Macklem said he expects inflation to remain near 3% in the near term before gradually returning to the central bank’s 2% target.

Gasoline prices increased 33.2% year-over-year in May, accelerating from a 28.6% gain in April. The escalation was largely driven by supply concerns linked to the conflict in the Middle East, particularly disruptions associated with the closure of the Strait of Hormuz. These uncertainties pushed gasoline prices higher for a third consecutive month. As a result, Canadians paid the highest prices at the pump since June 2022, when Russia’s invasion of Ukraine triggered similar supply fears and a sharp increase in global energy costs.

Four of the eight major components accelerate in May
Prices for fresh fruit rose at a faster pace year over year in May (+5.3%) compared with April (-0.5%). Berries and grapes mostly drove the acceleration. On a year-over-year basis, prices for fresh vegetables increased 9.0% in May, following a 4.1% rise in April. The upward movement was attributed to higher prices for broccoli, cauliflower, tomatoes and lettuce. Tomato prices rose 45.2% in May due to supply contractions in Mexico, stemming from poor weather and a reduction in planted acreage following the implementation of US tariffs.

On a month-over-month basis, prices for fresh vegetables rose 5.5% in May following a decline of 3.9% in April. This is the largest monthly increase in May since 2008 and is attributed to reduced supply and higher fuel costs.

Collectively, higher prices for fresh fruit and fresh vegetables contributed to an acceleration in inflation for food purchased from stores, rising 4.3% year over year in May, the 16th consecutive month it has outpaced headline inflation on a year-over-year basis. Food prices will continue to rise, reflecting a 40% increase in nitrogen fertilizer prices during the planting season.

Shelter inflation continued to moderate in May, with prices rising 1.7% year-over-year, down slightly from 1.8% in April. The homeowners’ replacement cost index fell 2.5%, marking its 13th consecutive decline. Other owned accommodation expenses, including real estate commissions, decreased 2.1% following a 2.7% drop in April. Meanwhile, mortgage interest costs edged lower, declining 0.2% year-over-year compared with a 0.1% decline in April, extending a 33-month trend of slowing mortgage cost inflation.

Rent inflation also eased modestly, rising 3.5% from a year earlier versus 3.6% in April, the slowest pace of rent growth since January 2022.

Price growth for durable goods was unchanged at 1.9% year-over-year in both April and May. A notable source of upward pressure came from computer equipment, software, and supplies, where prices rose 3.9% after declining 0.2% in April. Higher costs for key components such as random-access memory (RAM) and solid-state drives (SSDs), driven by strong demand from artificial intelligence data centres and limited production capacity, contributed to the increase.

Offsetting some of these gains, price growth slowed across several other durable goods categories. Increases were more modest for tools and household equipment (+1.1%) and passenger vehicles (+2.5%), while prices for household appliances fell 5.7% year-over-year, a steeper decline than previously recorded.

Bottom Line

Today’s inflation report reinforces our view that higher gasoline prices will temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader surge in underlying inflation. While food and transportation continue to account for a disproportionate share of price growth, inflationary pressures across the economy are generally moderating amid a softer labour market and slowing domestic demand.

May data support our base-case scenario that the Bank of Canada will remain on hold through the remainder of 2026. Policymakers will continue to closely monitor incoming inflation data and stand ready to tighten policy if price pressures broaden and become more persistent, but for now, underlying inflation trends remain consistent with a patient, wait-and-see approach.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
10 Jun

Bank of Canada Holds Policy Rate Steady

General

Posted by: Jen Lowe

Bank of Canada Holds Policy Rate Steady
Today, the Bank of Canada once again held the policy rate at 2.25%. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. With inflation hovering at 2.8% and core inflation falling to 2.0% (as of April data), the Governing Council sees the current overnight rate as appropriate, as the Bank continues to look through the inflationary impact of the war in Iran. The war is in its fourth month, and oil prices and interest rates have risen considerably as a result. The war is disrupting supply chains, weakening economic activity and pushing up inflation. At the same time, the US administration continues to propose new tariffs, and the future of CUSMA remains uncertain.

CUSMA negotiations are underway, but they are unlikely to go on beyond the July 1 mandatory date for the formal review of the pact required by the treaty. On that date, the U.S., Canada, and Mexico are each supposed to declare whether they want to renew the deal for another 16 years (out to 2036), renegotiate it, or decline to renew. The three countries are set to miss the July 1 renewal milestone, with negotiations expected to stretch on for months or potentially years. Missing the date does not kill the deal. If the three don’t agree to a full 16-year extension, the agreement stays in force and shifts into a mechanism of rolling annual reviews that can continue for up to a decade. The treaty doesn’t formally expire until July 1, 2036, unless a party withdraws entirely. US Trade Representative Jamieson Greer said that on July 1, “I don’t think we’re going to renew it outright, but we’ll engage in the separate negotiations” — explicitly signalling the date is a starting point, not a hard conclusion. Dominic LeBlanc, the minister responsible for US trade, met with Greer in Washington and afterward suggested that July 1 “shouldn’t be seen as a crucial date.” Mexican and US officials say the scope and complexity of the issues — auto rules of origin, the 50% Section 232 steel/aluminum tariffs, and other disputes — make resolution by July 1 unlikely.

While first-quarter GDP growth in Canada showed a small contraction, economic growth has been solid in the US, boosted by consumption and AI-related investment. In the euro area, growth is subdued, with higher energy prices weighing on activity. China’s economic growth continues to be supported by strong exports, while oil imports have slowed substantially. Oil demand destruction is evident as China has chosen to limit energy use and draw down inventories.

Financial conditions in Canada have eased since the April Monetary Policy Report (MPR). Global equity markets have been buoyant, and bond yields, though volatile, have generally trended higher. The Canadian dollar has weakened against the US dollar and other currencies.

Canada’s economy contracted in the final quarter of last year. It weakened a bit further in Q1, but incoming data suggest that the first-quarter figure was weighed down by the 10% surge in imports, which has already reversed in the newly released April merchandise trade data. The flash estimate for April GDP is a more solid 0.4% quarter-over-quarter level (or 1.6% at an annual rate). The central bank expects growth to rebound in Q2, but even so, the economy is expected to remain in excess supply.
As expected, Canadian CPI inflation rose to 2.8% in April. Measures of core inflation declined to about 2%, and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high, and shelter inflation continued to slow. With global oil prices still elevated—roughly $10 per barrel above our April MPR assumptions—total inflation is expected to hover around 3% in the near term before gradually easing towards 2%.

In other news, the US CPI inflation report for May was released this morning:

  • US inflation accelerated again in May as the war in Iran pushed up energy prices, outpacing wages for a second straight month. The US consumer price index climbed 4.2% from a year earlier, the most since early 2023.
  • Core CPI, which excludes food and energy, increased 0.2% from April, a touch below expectations and taking some of the sting out of the Fed debate.
  • The energy index rose 3.9% in May, accounting for over 60% of the monthly all-items increase.
  • But other categories saw slower gains or outright declines: Grocery prices rose 0.1%, while transportation services, health insurance and new vehicle prices fell.
  • The breadth of price increases also declined, providing another sign that inflation has likely peaked.
  • The S&P 500 opened lower while Treasuries and the dollar wavered on the news.

Overall, today’s US CPI report sent a clear signal that consumers are pulling back on nonessential spending, pushing back against businesses’ attempts to raise prices. This should ease fears of Fed rate hikes following the blowout May payrolls report. Bloomberg News suggests that they still expect the Fed to hold rates steady at the June 12 meeting and to cut the overnight fed funds rate by 25 basis points in the fourth quarter of this year.

Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty and a record oil price shock. Ottawa, too, has taken actions to reduce the burden of higher prices on Canadians by temporarily eliminating the excise tax on oil. PM Carney is also working to diversify Canada’s trade away from the US, a strategy that has thus far been remarkably successful. As the charts below show, Canadian export diversification is gaining momentum. In addition, goods imports are also shifting away from the US to the rest of the world.

We continue to maintain the view that the Bank of Canada will keep rates steady this year. If inflation broadens and accelerates, rate hikes are possible, but that is not our baseline forecast. The Bank of Canada will be reluctant to tighten into housing market weakness. While housing activity strengthened in May, momentum is muted, and affordability improvements are likely to taper off in the coming months as trade tensions and the war keep oil prices and interest rates elevated.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
1 Jun

Canada’s Economy Edges Into A Technical Recession For the First Time Since 2020

General

Posted by: Jen Lowe

Canada’s Economy Edges Into A Technical Recession For the First Time Since 2020
Statistics Canada reported this morning that the Canadian economy contracted slightly, by 0.1%, at a seasonally adjusted annual rate in the first quarter (Q1) of 2026. That follows a 1% contraction in the fourth quarter, a downward revision from the previously reported 0.6% decrease.

Higher imports of goods, particularly gold, were offset by accumulations of business inventories. Decreased business and government capital investment was offset by higher household spending, as final domestic demand edged down 0.1%.

On a per capita basis, real GDP increased 0.2% in the first quarter of 2026, as the population declined for a second consecutive quarter and GDP remained unchanged.

The surprise decline in the first quarter stands in contrast with forecasters’ expectations. Economists surveyed by Bloomberg were anticipating a 1.5% annualized increase in the first quarter, aligning with the Bank of Canada’s projection.

The last time Canada recorded two consecutive quarters of negative growth was in 2020 during the COVID-19 pandemic. Before that, it was in 2015 amid low oil prices.
The loonie fell to a session low after the report, trading at C$1.3822 per US dollar as of 8:58 a.m. in Ottawa. Canadian government bond yields dipped to a daily low, extending outperformance versus Treasuries, with the two-year benchmark falling 5 basis points to 2.792%.

The weaker-than-expected GDP data coincides with a looser job market, painting a softer picture of the Canadian economy as US tariffs continue to squeeze some businesses.
Bottom Line

The weaker-than-expected economic activity comes amid sustained political pressure on affordability, driven by a spike in oil prices stemming from the closure of the Strait of Hormuz following the war in Iran. With April inflation data for Canada coming in softer than expected, the Bank is likely on hold for the time being.

A flash estimate for industry-based data in April suggests the economy bounced back with 0.4% growth, driven by increases in mining, quarrying, and oil and gas extraction, as well as in manufacturing, transportation, and warehousing. That followed a 0.1% decline in March.

In direct contrast to the US, Canadian business capital investment in the first quarter posted a fifth consecutive decline, shrinking 3% on an annualized basis, driven by lower spending on engineering structures. In the US, business capital spending is booming, driven by AI-related data centre expenditures.

Business investment in residential structures fell 2.0% in Q1 of this year, following a 2.4% decline in the fourth quarter of 2025. The first-quarter decline was led by continued weakness in resale housing activity (termed “ownership transfer costs”), which fell 9.9% in the first quarter of 2026, following a 3.4% decline in 2025 overall. In the first quarter of 2026, new residential construction edged down 0.1%, led by decreased absorptions (the indicator for sales) of completed units, while work put in place for row homes and apartments increased.

Government capital investment also shrank 9.6% annualized after a sharp increase in weapons-system spending in the fourth quarter. StatCan noted that despite this decrease, the $8.3 billion outlay on weapons systems in the first quarter was still well above the average quarterly spending recorded since 1981.

Household spending increased 1.5% annualized in the first quarter, led by higher spending on financial services. However, the report noted Canadians pulled back on travel and vehicle purchases.

The household saving rate slowed to 3.5%, its lowest level since the first quarter of 2024, as spending rose faster than income.

Meanwhile, corporate income rose for a third consecutive quarter, up 1.6% on a quarterly basis, helping to explain the continued appreciation in stock markets.

Imports surged 12% on an annualized basis, reflecting gold shipments that were offset by accumulations of business inventories.

Exports fell 0.5%, led by a decline in passenger cars and light trucks, which US tariffs have battered. Meanwhile, higher shipments of crude oil and crude bitumen, as well as natural gas, offset much of that decline.

Finally domestic demand fell 0.4%, following a 2.7% increase in the previous quarter.

All in, I expect the Bank of Canada to remain on hold at the June 10th announcement meeting. Next Friday, we will see the May employment report, which is likely to remain tepid, prompting the Governing Council to hold the overnight rate steady at 2.25% for the fourth consecutive time, choosing to look through the short-term impact of higher oil prices on inflation while monitoring softer economic conditions.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres