Canada CPI Preview: Forecasts from six major banks, inflation expected to decelerate sharply in May

We look for CPI to fall 0.9pp to 3.5% YoY in May with a 0.5% MoM increase offset by base effects. Energy will exert a modest drag, but we expect large contributions from food along with rents and MIC. We also look for broad strength elsewhere, which should translate into another 0.4% MoM increase for core measures, leaving CPI-trim/median trending above 4% on a 3m ann. Basis.

We look for ‘headline’ price growth to slow – falling to 3.6% annually from 4.4% in April. Lower energy prices (gasoline and fuel oil prices were down 18% and 36%, respectively, from year-ago levels in May) explain most of that slowdown. And food price inflation is expected to edge lower again after peaking in January.

A slight decline in gasoline prices, coupled with further moderation in the food segment, could have translated into a 0.3% increase in the consumer price index in May (before seasonal adjustment). If we’re right, the 12-month rate of inflation should come down from 4.4% to a two-year low of 3.2%. The core measures preferred by the Bank of Canada should decrease as well. 

We remain hopeful that inflation will moderate to some extent, with core CPI potentially dropping below 4%. However, as with the Fed, this probably won’t be enough to prevent a final 25 bps hike in July.

Canadian inflation will look a lot tamer in May, albeit mainly because of base effects as gasoline prices this year are compared to the peaks seen in 2022. The headline inflation rate of 3.3% would be the lowest since June 2021, although it would still sit above the upper end of the Bank of Canada’s target bound. Moreover, core measures of inflation likely saw little progress, with ex food/energy expected to decelerate more modestly to 4.0% YoY, versus 4.3% in the previous month. The reweighting of the inflation basket, which increases the weight of services such as air transport and travel tours, could bring a slightly stronger monthly price increase in May compared to the old weights.

We expect a 0.4% MoM increase in headline CPI in May, with base effects leading the YoY reading to drop substantially to 3.4%. After a stronger-than-expected increase in April CPI, there remain upside risks to May inflation. While the YoY headline CPI will decline substantially in May after an unexpected pick-up in April, the most important element of May inflation data will be the 3-month trend in the core inflation measures. The average 3-month run rate of CPI-trim and CPI-median unexpectedly reaccelerated in April from 3.4% to 3.7%. While “base effects” will likely also lead the annual rates of core inflation to moderate slightly further in May, the 3-month pace of core inflation remaining stable in a 3.5-4% range since August 2022 will imply the annual rate of core inflation likely also stabilizes in this range soon. We expect that with the 3-month core inflation rate remaining at 3.7% or rising, this would all but solidify another 25 bps rate hike in July. Core CPI would have to slow substantially, likely to below 3.4% in order to substantially reduce the probability of a hike in July.