• Canada’s inflation rate accelerates and is higher than expected.
• Core inflation also accelerates.
• Canadian Dollar remains steady.

Canada’s Consumer Price Index (CPI) rose to 2.9% year-on-year in May, up from a three-year low of 2.7% in April. The acceleration in inflation surprised the markets which had expected a drop to 2.6%. The surprise gain was fueled by higher prices for air transportation, food and health and personal care. Monthly, inflation rose to 0.6% in May, up from 0.5% in the previous month and double the market estimate of 0.3%.  

The average of two of the Bank of Canada’s (BOC) core measures of inflation rose 2.85% year-on-year in May, up from 2.7% in April. Core CPI excludes food and energy items and is considered a more reliable indicator of inflation trends than CPI.

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Will BoC cut rates in July?

The inflation report is a disappointment for the Bank of Canada, which has been waging a long battle to bring inflation back down to the 2% target. Still, both the headline and core readings remained within the Bank of Canada’s inflation target band of 1%-3%.

The Bank of Canada lowered rates earlier in June, the first central bank in the G7 to make such a move. The rate cut was the first since the BoC started its steep rate hike cycle in March 2022. The cut indicated that the BoC was willing to shift policy even though inflation was above 2%.

Policy makers aren’t likely to lower rates a second time until they are convinced that inflation is not making a comeback. Today’s inflation release will likely dampen expectations of a rate cut but a rate cut is still on the table. Canada releases the June inflation report just a week before the BoC holds its July meeting. If inflation resumes its downtrend, it could set up a back-to back rate cut at the July meeting.

Canadian Dollar Ticks Lower, Stock Market Posts Losses

The higher-than-expected inflation report has had a limited impact on the movement of the Canadian dollar today. The USD/CAD currency pair showed little movement ahead of the inflation announcement and declined by 0.15% after the release. The USD/CAD forecast is unchanged on the day, trading at 1.3652 early in the North American session.

The benchmark Canadian index, the S&P/TSX, opened today just a short while ago. The index is in negative territory, down 109.63 points (0.50%) at 21,738.96 points. The inflation report was a disappointment for investors and this is reflected in the decline in the stock market early in the Tuesday session.

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