Easing Inflation Bolsters View Canada Can Wait to Lift Rates

  • Food costs rise 1.8% in smallest increase since 2014
  • Annualized and monthly CPI gains trail economist forecasts

Canada’s inflation rate eased in May as food costs rose at the slowest pace in more than two years, reinforcing the idea the central bank can afford to wait before raising interest rates.

The consumer price index advanced 1.5 percent in May from the same month a year earlier, following April’s 1.7 percent reading, Statistics Canada said Friday from Ottawa. Price increases for fresh fruit and vegetables slowed, and the cost of gasoline declined.

Governor Stephen Poloz cut the Bank of Canada’s policy interest rate to 0.5 percent last year in an effort to return price gains to a 2 percent target. Total inflation hasn’t exceeded that metric since October 2014. Poloz said during a speech this week the recovery from an oil shock still needs time to play out.

“Canada’s economy is undergoing this prolonged adjustment to lower oil prices, and we don’t think that there is going to be strong enough inflationary pressures building towards a rate hike until looking into 2018,” said Leslie Preston, senior economist at Toronto-Dominion Bank.

Price increases for fresh fruit slowed to 4.9 percent from 11 percent in April, and food inflation moderated to 1.8 percent from 3.2 percent. Canada imports much of its fresh produce through the winter, and prices jumped earlier this year in part because the country’s dollar fell against its U.S. counterpart.

Erik Hertzberg/Bloomberg

Cheaper gasoline was another contributor to slower inflation, as year-over-year prices fell by 7.1 percent in May, compared with a 5.8 percent drop in April. That trend may not last, with Statistics Canada reporting a monthly gain of 4.1 percent, the third straight increase.

Canada’s dollar remained higher after the report, breaking the longest string of losses since January as crude oil prices rose. The currency strengthened 0.9 percent to C$1.2853 per U.S. dollar at 10 a.m. Toronto time.

The core rate that excludes eight volatile products slowed to 2.1 percent in May from April’s 2.2 percent. Inflation on a monthly basis rose 0.4 percent in May from April, less than the 0.5 percent rise predicted in a Bloomberg News survey of economists. Core prices rose 0.3 percent on the month, matching the median forecast of economists.

“The resilience of core inflation in the first half along with the performance of the Canadian economy does not suggest that further monetary stimulus is required,” Matthieu Arseneau, senior economist at National Bank in Montreal, wrote in a note to clients.

For shoppers gripped earlier this year by nationwide headlines about skyrocketing cauliflower prices, Statistics Canada’s report Friday may mark an end to the tale. Fresh vegetable price increases slowed to 1.9 percent from 11.7 percent in April.

Economists surveyed by Bloomberg News forecast the total year-over-year inflation rate would be 1.6 percent, and core at 2.1 percent.

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