Inflation Accelerates to 3.2 Percent in May, Above Bank of Canada’s Target

A person pumps fuel in Toronto in this file photo. The Canadian Press/Michelle Siu

Canada’s inflation rate rose to 3.2 percent in May, with higher energy prices stemming from the war in Iran again driving the increase, according to Statistics Canada.

The country’s Consumer Price Index (CPI), which was at 2.8 percent in April and 2.4 percent in March, is now higher than the Bank of Canada’s target range of between 1 percent and 3 percent.

Statistics Canada said in its June 22 report that gasoline prices rose at a faster pace in May, increasing by 33.2 percent on a year-over-year basis, compared to 28.6 percent in April. The agency attributed the increase to Iran’s efforts since March to close the Strait of Hormuz, a critical shipping route through which roughly 20 percent of the world’s oil supply passes.

While a memorandum of understanding signed by the United States and Iran last week called for the strait to be re-opened, shipping volumes have still been reduced, and Iran announced on June 20 that it was closing the strait again due to continued Israeli attacks on Lebanon.

The price of West Texas Intermediate (WTI) rose to US$110 immediately following Iran’s closure of the waterway, but has since fallen back down to around $US80.

StatCan said Canadians paid the “highest prices for gasoline since June 2022, when Russia’s invasion of Ukraine created supply uncertainty.” The outset of that conflict saw WTI rise to US$120.

The Liberal government temporarily suspended the federal fuel excise tax in April, which it said would lower gas costs by 10 cents per litre on regular gasoline and four cents on diesel. The suspension will be lifted at the start of September.

StatCan said food inflation rose by 4.3 percent in May after rising by 3.5 percent in April, which marked the 16th consecutive month food inflation has “outpaced headline inflation on a year-over-year basis.” Fresh fruit prices rose by 5.3 percent compared to a decline of 0.5 percent in April on a year-over-year basis, while fresh vegetables increased 9 percent in May after a 4.1 percent rise in April.

Shelter prices rose by 1.7 percent in May after a 1.8 percent increase in April. The growth of rental prices slowed in May, rising by 3.5 percent after a 3.6 percent increase the prior month.

The price growth for durable goods was at 1.9 percent in both April and May. While computer equipment and software rose by 3.9 percent in May after a 0.2 percent fall in April, household appliance prices fell by 5.7 percent, prices for passenger vehicles rose by 2.5 percent, and the prices of tools and other household equipment rose by 1.1 percent.

Canadians paid 0.7 percent more for travel tours in May, while prices had fallen by 11 percent in April. Due to higher jet fuel prices, the cost of air transportation rose by 7.4 percent in May after a 1.7 percent decline in April.

Bank of Canada Projections

In its April Monetary Policy Report, the Bank of Canada said that if oil prices remained at US$100 per barrel through 2028, inflation would peak at 3.1 per cent in early 2027 and remain near three per cent for more than a year, likely prompting interest rate hikes to contain price pressures.

In its June 10 rate decision, the Bank of Canada held its benchmark interest rate at 2.25 percent for a fifth consecutive meeting. Governor Tiff Macklem warned that persistently high energy prices could put upward pressure on inflation and eventually require higher interest rates. At the same time, he said new U.S. tariffs could weaken economic growth and warrant rate cuts, creating what he described as a “dilemma” for monetary policy.

BMO Chief Economist Doug Porter wrote in a note to clients that May’s inflation rate was above expectations and the highest increase since late 2023. Porter said there is “mixed” evidence that rising energy prices are trickling down into higher inflation for other goods.

Porter said the fall in gasoline prices would likely lower Canada’s inflation rate in June. “Still, the persistence of food inflation is a significant thorn, and we have to rate this one as a mild disappointment overall. It’s never good news to see the overall inflation rate track above 3 percent, even if it is for one month only,” Porter said.

Conservative Leader Pierre Poilievre told reporters that the StatCan report shows Canada has the “worst food price inflation” in the G7. “The Carney Liberals continue inflationary policies that drive up costs here at home. We need to reverse those policies and make Canada affordable,” he said.

Prime Minister Mark Carney told reporters on June 2 that household income growth was outpacing inflation, but that there was “more to be done without question.” Carney also said lower population growth and falling government spending had contributed to “weakness” in Canada’s economy.