Canadian policymakers received a sense of relief with the latest inflation figures released on Monday. The year-over-year inflation rate in May spiked to 3.2 percent, with notable increases in gasoline prices by 33.2 percent and grocery prices driven by produce, particularly tomatoes, which saw a 45.2 percent surge.
Although consumers have been facing challenges in a weak economy, the surge in prices has mainly been concentrated in energy-related sectors. Michael Davenport, a senior economist at Oxford Economics, mentioned in a research note that headline inflation likely peaked in May, with gasoline prices already dropping about 10 percent from their peak the previous month.
Economists are closely monitoring core inflation measures that exclude volatile components to gauge the underlying trends. There have been no significant signs of widespread inflation across the Consumer Price Index (CPI) basket, with both Bank of Canada preferred core inflation measures remaining steady at around two percent year over year.
Despite the recent decline in energy prices, such as Brent crude dropping to $77 from its peak of $118 in April, the situation remains uncertain. The ongoing war tensions have kept prices elevated compared to pre-war levels. Even if the Strait of Hormuz reopens fully, economist Jim Stanford from the Centre for Future Work warns that the repercussions on prices and inflation could persist for months.
With businesses being heavily impacted by energy price increases, there is a possibility that these costs may be passed on to consumers. This was evident in the May data, which showed rising transportation costs, travel expenses, and food prices, especially tomatoes. Statistics Canada attributed the spike in tomato prices to supply disruptions in Mexico caused by adverse weather conditions and reduced acreage due to U.S. tariffs.
While May’s inflation surge was higher than anticipated, the majority of price hikes were confined to expected sectors. As gas prices have already started to retreat, upcoming CPI data is likely to reflect this trend. However, concerns persist as long as energy prices remain elevated, leading to potential cost transfers from businesses to consumers.
