Canadian policymakers received a welcome relief with the latest inflation figures released on Monday. In May, the year-over-year inflation rate jumped to 3.2%, driven by a 33.2% increase in gasoline prices and higher grocery costs, particularly in produce which relies heavily on diesel for production and transportation. Notably, tomato prices surged by 45.2%.
While these price hikes have put pressure on consumers in a struggling economy, the silver lining is that the inflation surge was mostly confined to energy-related sectors. According to Michael Davenport, a senior economist at Oxford Economics, it is likely that headline inflation peaked in May, with gasoline prices already dropping around 10% from their peak.
Economists are closely monitoring core inflation indicators, which exclude volatile components, to gauge underlying trends. The Bank of Canada’s preferred core inflation measures have held steady at around two percent year over year, indicating no significant broadening of inflation across the Consumer Price Index basket.
Despite the recent decline in energy prices, concerns remain. Although Brent crude prices have fallen from their April peak of $118 to $77 per barrel, they are still significantly higher than pre-war levels. The ongoing war between the U.S., Israel, and Iran has disrupted oil markets, with uncertainties surrounding the reopening of the Strait of Hormuz.
Even if the Strait of Hormuz reopens, the repercussions on prices and inflation are expected to persist for months. Economist Jim Stanford warns that prolonged high energy prices could lead businesses to pass on cost increases to consumers, affecting various sectors such as airfares, travel expenses, and food prices.
The latest data for May reflected increased transportation costs, growth in travel and tourism, and rising food prices, particularly tomatoes. Statistics Canada attributed the spike in tomato prices to supply constraints in Mexico caused by adverse weather conditions and reduced planted acreage following U.S. tariffs.
While the May inflation surge exceeded expectations, most price increases were concentrated in predictable sectors. The recent retreat in gasoline prices is likely to reflect in next month’s CPI data. However, as long as energy prices remain elevated post-war, there are concerns that businesses may transfer these additional costs to consumers.
