Canada Inflation Surprisingly Rises in May, Markets Trim July Rate Cut Bets

  • Consumer prices in Canada took an unexpected turn and rose in May, data showed on Tuesday, after showing signs of an almost consistent cooling since the start of the year, forcing markets to trim hopes of a rate cut in July to below 50.0%. The Bank of Canada, which cut interest rates for the first time in four years this month, has repeatedly maintained that the path towards further rate easing would be data-dependent and May's inflation data dampens the chance of an immediate rate cut.
  • In May, the annual inflation rate accelerated to 2.9% from 2.7% a month ago. Key measures of core inflation edged up for the first time in five months, according to Statistics Canada. As a result, money markets heavily trimmed their bets and now see a 45% chance of a rate cut in July, from over 70% seen on Monday.
  • Analysts polled by Reuters had forecast inflation to cool to 2.6%. Month-over-month, the consumer price index was up 0.6%, exceeding a 0.3% rise forecast. The surprise acceleration in headline inflation was driven by prices for services, including cellular services, travel tours, rent and air transportation.
  • CPI-median and CPI-trim, the Bank of Canada's preferred measures of underlying inflation, rose for the first time since December, contrary to market expectations. The CPI-median sped up to 2.8% from 2.6% in April while CPI-trim accelerated to 2.9% from 2.8%. Economists had forecast CPI-median to remain at 2.6% and CPI-trim to be 2.8%.
  • Excluding volatile food and energy, prices rose 2.9% compared with a 2.7% rise in April. Service prices increased 4.6% in May, compared with a 4.2% rise in April, while goods inflation remained at 1%. Mortgage costs continued to rise due to higher interest rates, but the pace slowed marginally to 23.3%. Rental inflation, however, soared to 8.9% after slowing to 8.2% in April.

(Source: Reuters)