This is despite softer-than-expected annualized inflation levels in May
While the latest core inflation numbers offered a measure of relief with a softer-than-expected annualized rate of 3.4% in May, every inflation metric remains “far above” the Bank of Canada’s 2% target, according to BMO Economics.
“Looking ahead to the June figures … gasoline prices are on pace to climb roughly 2.5% in the month, which won’t do any favours for CPI,” BMO said. “The year-ago comparables become a bit more challenging in the second half of the year, suggesting headline inflation will oscillate around 3% as we head into 2024.”
Sustained strength in mortgage interest costs (which have increased by 29.9% annually) continues to negate the impact of lower utilities prices and smaller rent increases since late last year, BMO said.
Food is another major factor that could fuel overall inflation levels, BMO cautioned.
“Food inflation continues to bite, rising 0.8% m/m (+0.5% seasonally adjusted), keeping the yearly rate at +8.3% y/y despite the slowing on the producer front,” BMO said. “There’s likely some softening ahead for food inflation, but this will likely remain a sore spot for consumers for some time.”
What these pieces of data indicate is a strong possibility of another BoC policy rate hike next month.
“Bank of Canada policymakers won’t breathe a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown,” BMO said. “The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next two weeks, a hike still looks likely.”
