Inflation rate expected to drop. What that means for the Bank of Canada – National | Globalnews.ca

The annual rate of inflation likely dropped sharply last month, economists say, but some argue a slowdown might not be enough to deter the Bank of Canada from another rate hike in July.

Statistics Canada is set to release its consumer price index (CPI) report for May on Tuesday at 8:30 a.m. ET.

Most economists are expecting the headline inflation rate dropped significantly last month after reaching 4.4 per cent in April — a surprise uptick from 4.3 per cent the previous month and the first time the inflation rate rose in 10 months.

BMO Economics is projecting inflation fell by a full percentage point to 3.4 per cent in May, marking a two-year low in the annual rate. That’s despite signs that the housing market was picking up steam again last month, which BMO senior economist Priscilla Thiagamoorthy said in a note to clients Monday will put more pressure on the shelter component of CPI.

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Meanwhile, RBC Economics projects a more modest drop to 3.6 per cent in the May inflation report.

Nathan Janzen, assistant chief economist at RBC, tells Global News the “biggest factor” is the difference in energy price trends this year compared to last.

Prices for gasoline and oil spiked in the spring and summer of 2022 following Russia’s invasion of Ukraine. Janzen explains that with those price increases falling out of the annual inflation data, the year-to-year price growth will be diminished as a result.

For this reason, Janzen says that the Bank of Canada won’t pay too much heed to the decline in the annual figures. Instead, he says policymakers will pay closer attention to the shorter-term monthly trends and the central bank’s preferred “core measures” of inflation in deciding whether enough steam has been taken out of price pressures.

Janzen says Tuesday’s CPI release is a “very significant report” for the Bank of Canada in weighing whether it needs to deliver another shock to the economy with a second consecutive rate hike in July.

But he also notes that inflation tends to be a “lagging indicator” — showing the results of what’s already come to pass in the economy.

Other economic releases in the calendar ahead of the July 12 rate decision such as the June jobs report and the Bank of Canada’s own business outlook survey will inform whether it’s done enough to keep bringing inflation down all the way to the two per cent mark.

“Those are all indicators that they’ll use to tell them where inflation is going in the future, not just where it is today,” he says.

Janzen adds that there will have to be significant signs of slowing in these economic releases for the Bank of Canada to return to its pause. If policymakers didn’t think 425 basis points of policy rate tightening was enough, he says it’s not likely an extra 25 basis points will satisfy the central bank that inflation is set to return to two per cent.

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