MNI: Canada May CPI Unexpectedly Quickens to 2.9% On Services

Inflation hit the kind of bump Bank of Canada Governor Tiff Macklem warned about with headline and core prices unexpectedly accelerating in May led by services and high-profile items like rent and food.

Overall consumer prices rose 2.9% in May from a year ago according to Statistics Canada's report Tuesday from Ottawa, faster than April's three-year low of 2.7% and ahead of the economist forecast CPI would slow a notch to 2.6%.

Core measures preferred by the central bank also accelerated with the trim index moving to 2.9% from 2.8% and the median index to 2.8% from 2.6%, the first such increases this year. While all of those figures extend a run of inflation holding within the Bank's 1% to 3% target band, it runs against what officials have called their increasing confidence trend inflation is progressing back to the 2% target itself. 

Gains in total CPI were led by the 8.9% increase in housing rents, a 5.6% rise in gasoline and a 4.2% rise in restaurant meals, Statistics Canada said. Car insurance rates also climbed 7% and mortgage interest cost increases remained elevated at 23%. The pressure followed a familiar global split between goods inflation that was little changed at 1% and services quickening to 4.6% from 4.2%. Part of that services inflation was linked to a "base effect" from a reduction in mobile phone rates a year ago. 

The Bank of Canada lowered interest rates for the first time in four years earlier this month by a quarter point to 4.75%, and on Monday Macklem reiterated more cuts are justified if inflation keeps moving as expected. The Bank's April projection was for inflation to average 2.9% in the second quarter and around 2.5% in the second half before returning to target sometime next year. That projection could remain intact especially with another CPI report due before the Bank's next rate meeting on July 24. 

Most economists before the CPI report said the Bank will cut rates another quarter point at the July meeting based on their view inflation wouldn’t accelerate in this report.

Food prices accelerated a notch to 1.5%, notable because it's the first increase in a year and it's a high profile items for households. Inflation has exceeded the Bank’s 2% target for about three years now. That brings concerns about inflation expectations and second-round effects from bigger wage demands.

The report reflects some minor adjustments to the weights in the CPI basket earlier this month, which boosted shelter and transportation. The changes had little effect on today's result.