Inflation fell to 3.4 percent in May: Statistics Canada

Year-on-year inflation fell in May, largely due to lower oil and gas prices, Statistics Canada said Tuesday morning.

The consumer price index – a broad measure of inflation – was 3.4 percent higher in May than a year ago. That is a significant decrease from the annual inflation rate of 4.4 percent observed in April.

“Lower energy prices (gasoline and heating oil prices were 18 percent and 36 percent lower, respectively, than in May last year) explain most of that slowdown,” RBC economists Nathan Janzen and Claire Fan wrote in a note ahead of the release.

The biggest contributor to inflation was mortgage interest costs, which were 29.9 percent higher than the same period last year, as more Canadians renewed their mortgages at higher interest rates. Inflation in groceries also remained high, at 9 percent.

In April, annual inflation rose from 4.3 percent in March to 4.4 percent. That was the first time the annual figure rose since inflation peaked at 8.1 percent last June.

Last March, the Bank of Canada launched an aggressive rate hike campaign in an effort to bring down inflation, raising its key overnight interest rate from 0.25 percent to 4.5 percent.

The theory is that by making it more expensive to borrow money, consumers – and businesses – will spend less, driving down prices and slowing down the economy.

The bank’s goal is to reduce consumer price growth to two percent.

In January, a 25 basis point (a quarter of a percentage point) increase came along with a statement from Bank Governor Tiff Macklem that he was pausing increases — at least temporarily.

But a steady stream of stronger-than-expected economic data — including rising inflation in April — brought another rise to the table, and the Bank hiked its rate to 4.75 percent on June 7.

Tuesday is the last inflation data before the Bank’s next interest rate decision on July 12.

This is an evolving story.

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