MNI: Canada CPI Holds at 1.7% In May, Core Rates Slow To 3%

Canada's inflation rate remained 1.7% in May while core indexes slowed a tenth to the top of the central bank's target band at 3%, a report doing little to settle conflicting market bets around Governor Tiff Macklem holding borrowing costs for a third meeting next month or returning to cutting. 

Smaller rent increases alongside slower population growth put downward pressure on Statistics Canada's consumer price index while there was a lift from gasoline prices according to the report Tuesday from Ottawa. With officials looking at a broader range of indicators to figure out price trends, the agency said inflation excluding food and energy was steady in May from April at a 2.6% year-over-year pace. 

Investors and officials were looking for whether the tariff war with the U.S. would begin showing up this month and the agency's report made little mention of that issue. Prime Minister Mark Carney says Canada's first round of retaliatory tariffs was designed to blunt the impact on households, but he's also signaled a second round if the 30-day window for a new trade pact fails. 

There is another inflation report July 15 ahead of the Bank's next decision July 30 and a majority of economists predict a quarter-point cut to the 2.75% policy rate on the idea trade tensions are pushing the economy into recession. Bank officials have said the outcome of the latest round of trade talks next month will be a major influence on which of the two scenarios for the economy they sketched out in April is emerging. 

Trade war or not, Macklem says the recent bout of elevated core inflation has his attention. The Bank has a single mandate to keep inflation at 2% and extending the earlier round of seven rate cuts is risky if there is another round of sticky prices with core inflation elevated. At the same time a recession would add to slack opening up in the job market where unemployment is the highest since 2016 outside the pandemic. 

Another StatsCan report today showed its flash indicator of factory sales showed a 1.3% decline in May, a month where tariffs took hold. "The largest decreases were in the petroleum and coal product subsector, the transportation equipment subsector and the food product subsector," the report said. 

The Bank has also discounted the slowdown in headline inflation, saying it's partly linked to a one-time elimination of a federal carbon tax.