By Robb M. Stewart
OTTAWA--Canadian inflation unexpectedly accelerated last month, a sign of the price pressures households continue to face and throwing up a potential hurdle for the central bank to offer up back-to-back rate cuts.
The consumer-price index, a measure of goods and services prices across the economy, rose 0.6% in May and 2.9% from a year earlier, Statistics Canada said Tuesday. That was faster than the 2.6% annual advance economists had forecast and comes after inflation eased to 2.7% in April.
Gains in core prices excluding volatile food and energy matched the headline CPI pace for the month and annually, while key indicators of underlying inflation preferred by the central bank also picked up.
Expectations have been high the Bank of Canada will again cut interest rates late next month, though there will be one further inflation report as well as monthly gross domestic product data released before the next policy meeting. The advance in inflation in May puts much more weight on coming data to offer signs the trend of cooling inflation is intact.
After heating up earlier in the year, inflation in the U.S. has eased in recent months, with the Labor Department's consumer-price index rising 3.3% annually in May.
The biggest drivers of consumer price growth in Canada last month remained mortgage-interest costs and rent in the higher rate environment.
Consumers also paid more for services including travel tours and flights, while prices for food bought at stores increased for the first time since last June, though only modestly. Grocery prices remain elevated, and have increased 22.5% compared with May 2020.
Earlier this month, the Bank of Canada became the first Group of Seven central bank to trim its policy interest rate, cutting it one-quarter percentage point to 4.75% after leaving it at a more than two-decade high for almost a year.
In a speech Monday, Bank of Canada Gov. Tiff Macklem said there was increased confidence inflation would continued to approach the central bank's 2% target this year and that signs of slack in the labor market thanks to strong population growth suggest the economy can grow without creating new inflationary pressures. Policymakers can't rule out new bumps in getting inflation under control, but Macklem said the country increasingly looks to be on its way to 2%.
The headline inflation rate has now been inside the 1% to 3% window the central bank targets for five consecutive months, even with May's advance, while the economy returned to growth in the early months of the year after stalling in mid-2023. Hiring continues but at a slower pace than population growth is expanding the labor force, so unemployment has been steadily rising and wage inflation has been softening.
Two measures of underlying inflation the central bank closely monitors sped up in May. Weighted median and trimmed mean CPI rose an average 2.85% last month from a year earlier compared with 2.70% growth in April, though that is still cooler than March's 2.95% pace.
Overall, prices for services in Canada rose 4.6% in May after a 4.2% boost the prior month, while prices for goods for a second straight month grew 1.0%.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
06-25-24 0906ET
