Following the latest inflation data, economists weighed in on what the uptick in inflation means for the Canadian economy amidst hopes for another interest rate cut by the Bank of Canada next month.  

On Tuesday, Statistics Canada released the latest consumer price index (CPI) data revealing a 2.9 per cent jump in May compared to last year. While some economists claim the recent data will tighten measures of risk management, others believe the central bank is still on course for rate cuts next month.  

BMO Capital Markets

Robert Kavcic, senior economist at BMO Capital Markets, says the recent numbers could prompt the central bank to be on high alert with policy decisions. 

During an interview with BNN Bloomberg on Tuesday, Kavcic pointed out that the Bank of Canada had been looking at positive inflation numbers over recent months.

“Unless something really goes wrong to suggest that momentum is stalling out or turning the other way, we could be setting out for a July rate cut. Unfortunately, just scanning across these numbers, it looks like something kind of did go wrong,” he said. 

According to Statistics Canada, the higher inflation rate is largely due to higher prices for services. On a monthly basis, the index increased 0.6 per cent, the data shows. On a seasonally adjusted basis, inflation increased 0.3 per cent. 

“I suspect as the market reaction plays out here over the next little while that the odds of that July rate cut are going to get scaled back pretty quickly,” Kavcic told BNN Bloomberg. 

“Grocery inflation is cooling down and we can see price trends at the producer level slowing down. So I suspect that’s going to continue.”

Broadly, Kavcic said goods inflation is largely subdued. 

“This really, at the end of the day, comes back to the consistent story we’ve been telling for a while and that is this is a housing and shelter story and more broadly a services story,” he said. 

He mentioned that rent costs, a major driver in financial strain for Canadians, are “outside the scope of Bank of Canada’s policy.” 

According to Kavcic, the issue is on the supply side and has more to do with demographics and immigration. 

“Service inflation more broadly is where we’ve seen more stubbornness. That’s typically more driven by things like wage pressure, and we do see consistent wage growth across various measures in the Canadian economy. So that’s kind of where we are stuck,” he said. 

Kavcic added that, over the past four months, “we’re still looking at core measures in the 1.8 to 2.9 per cent rate.” 

“We’re not seriously deteriorating. We’re not too far off from where the Bank of Canada wants to see it. I suspect that this particular number, maybe from a risk management perspective, we have to cool our jets a little bit.’  

RSM Canada

Tu Nguyen, economist at RSM Canada, says disinflation will be “the overarching theme for the remainder of 2024.”

In an email statement sent to BNN Bloomberg, Nguyen said that, despite the uptick in inflation in May, “a July rate cut is still in the cards if next month’s core inflation measures show favourably.” 

“Although services inflation remains a concern due to elevated wage growth, this trend is unlikely to persist through the year as consumer spending wanes and the labour market rebalances,” she said in the statement. 

She added that grocery inflation rose but still remains the lowest in years, excluding last month’s figure.  

“Bank of Canada Governor Macklem was decidedly dovish in his speech on Monday by suggesting that the economy can add jobs without pushing up inflation, and one sure way to stimulate hiring is to cut rates,” Nguyen said. 

“Though a July rate cut would widen the policy rate differential with the United States, the effect will be temporary since U.S. inflation is also expected to fall, possibly sharply, later this year.”

Nguyen said the temporary “hit to the Canadian dollar” will be worth the economic stimulation rate cuts will bring.

“Even if the Bank of Canada announced another rate cut in July, bringing the policy rate to 4.5 per cent, the policy rate will still be sufficiently restrictive given the growth and inflation outlook. Therefore, one month of accelerated inflation will give the Bank a pause but should not take rate cuts off the table.”

Royal Bank of Canada

Nathan Janzen, assistant chief economist at Royal Bank of Canada, said in a report Tuesday that the acceleration in May CPI growth is the “first significant upside surprise of 2024.”

“The closely-watched three-month growth rates for the median and trim measures ticked back above the two per cent inflation target, but year-to-date (five-month average) increases are still essentially bang-on two per cent,” the report says. 

Janzen added that Canada’s central bank is “highly data dependent,” which may put pressure on June’s CPI numbers being released ahead of the next policy rate decision in July.

“But softening per-capita GDP and rising unemployment also increases the odds that price growth will continue to broadly slow,” the report said.