At first glance, today’s inflation report looks pretty good for the Bank of Canada. Headline inflation was 1.7% in May, the second straight month below its 2% target.

The inflation cooldown, along with a softening economy, should (on the surface) be enough for the Bank of Canada to cut its policy rate next month.  

But before we get too carried away, the details will continue to raise eyebrows at Canada’s central bank. In particular…

• The retail carbon tax elimination as of April 1 flattered the headline reading once again, pulling down gasoline and natural gas prices relative to the same month last year. Excluding indirect taxes, inflation was 2.3% year-over-year (y/y).
• The Bank’s favourite core (or trend) measures of inflation sit firm at 3% y/y.

The case to cut in July (our view). There is risk that the Bank of Canada is behind the curve, as we’re in the early stages of the trade war induced slowdown. April exports plunged, and the unemployment rate sits at 7% - excluding the pandemic period, that’s the highest rate since 2016. Shelter costs are adding less to inflation, and a cooling economy will ease domestic inflation pressures.

The case to pause in July. The Bank seems comfortable with a ‘wait and see’ approach as they wait for more data and trade war uncertainty to clear. They worry that cutting too aggressively could reignite inflation pressures and inflation expectations at a time when ‘trend’ inflation is too high. Governor Tiff Macklem sounded a bit more ‘hawkish’ in his recent speech, notably this line: “if the recent firmness in underlying inflation were to persist, it would be more difficult to cut the policy rate”.  

Overall, we now see two more cuts this year (down from three expected earlier), but whether that cut happens in July is too early to call. The Bank of Canada is more data dependent than usual, and there are many data points to come before the July 30th meeting, including the June jobs and inflation reports. 

As for Alberta, inflation matched the national rate, coming in at 1.7%. Insurance costs contributed to a slightly higher inflation rate compared to April. Overall, Alberta inflation has moved back more in line with the rest of the country after spending many months above, mainly due to lower energy costs. 

Details of the inflation report for Canada…

• Canada’s consumer price index rose 1.7% in May over the same month last year.
• Excluding energy costs, the inflation rate was 2.7%
• Both key measures of core inflation - median and trim - at 3%. 

…and for Alberta:

• The consumer price index rose 1.7% y/y in May, up from 1.5% in April.
• Lower energy costs are responsible for the lower inflation readings. Excluding energy costs, the inflation rate was 2.9%

Answer to the previous trivia question: Located in southeast Calgary, Canada’s largest vertical farm facility is 96,000 square feet. 

Today’s trivia question: How many goods and services, in total, are covered in the Canadian consumer price index survey?