MNI: Canada May CPI Quickens to 7.7%, Fastest Since 1983

Canadian inflation quickened more than expected to 7.7% in May from a year earlier to mark the fastest pace since 1983 in a broad-based gain led by gasoline, boosting the case for the central bank to hike borrowing costs by more than half a percentage point.

The consumer price index rose 1.4% on a one-month basis, and that gain alone exceeds the bottom of the Bank of Canada’s 1%-3% target band for price gains over a full year. Economists predicted prices would climb 1.1% from April and 7.4% over the prior 12 months. The CPI had advanced 6.8% in April. 

Even excluding gasoline the inflation rate was 6.3%, more than triple the central bank's target. Prices at the pump increased 48% from a year ago following the invasion of Ukraine and as Canadians traveled more following looser Covid restrictions. The fuel oil and other fuels category surged 95%.

Core inflation rates preferred by the Bank climbed from an average of 4.4% to a record 4.7%. "Price pressures continued to be broad-based, pinching the pocketbooks of Canadians and in some cases affecting their ability to meet day-to-day expenses," Statistics Canada's report on Wednesday said.

Food purchased from stores rose 9.7% in May from a year earlier and shelter costs climbed 7.4%.

This is the last CPI data before the next BOC meeting on July 13. Governor Tiff Macklem has said he could hike faster than his last two 50bp increases even before the Fed’s big hike earlier this month. The BOC hasn’t hiked by so much since a 100bp move in 1998 aimed at stabilizing a weak currency.

With the overnight rate still at just 1.5% ex-officials have told MNI there’s a need to quickly move rates to at least neutral, which the BOC estimates at 2%-3%. The Bank has also said it’s likely to raise its near-term inflation forecast again in July.

This CPI report included new basket weights that put more emphasis on transportation and clothing and less on housing, and StatsCan for the first time introduced a stand-alone category for used cars. Used passenger vehicle prices rose 2.2% in May from April, and headline CPI would have been the same without the introduction of used vehicles.

Inflation has also become a major political risk. Finance Minister Chrystia Freeland said Thursday the government will support the central bank's lead in the inflation fight and signaled she may introduce new fiscal stimulus if the economy has a hard landing. The speech shows that as for President Joe Biden inflation is the dominant domestic issue in a Canadian legislature where the Liberals lack a clear majority. Freeland rejected Conservative leadership candidate Pierre Poilievre's call to fire Macklem for failing to head off inflation, in part because price gains are largely a global problem.