The rate of inflation experienced a significant drop last month, raising questions about whether the Bank of Canada will proceed with another interest rate hike in July. According to Statistics Canada, the annual inflation rate for May decreased by one percentage point to 3.4 percent. Economists had anticipated a more modest decline to 3.6 percent. Nathan Janzen, assistant chief economist at RBC, attributes the drop in inflation to the difference in energy prices compared to the previous year. Energy prices decreased by 12.4 percent in May. However, grocery prices remained high, with a 9.0 percent increase compared to the previous year. Prices for edible fats and oils increased by 20.3 percent, bakery products by 15 percent, and cereals by 13.6 percent. The Competition Bureau’s investigation into concentration in Canada’s grocery sector found that a lack of competition is leading to higher prices. Rising mortgage costs due to higher interest rates from the Bank of Canada were the main contributors to the monthly Consumer Price Index (CPI) figures. The mortgage cost index rose by 29.9 percent annually, setting a new record for the largest increase. Meanwhile, prices for cellular services dropped by 8.8 percent, and furniture prices decreased by 2.9 percent. The Bank of Canada will consider these factors when deciding whether to implement another rate hike in July. Policymakers will pay closer attention to shorter-term trends and the central bank’s preferred measures of inflation. The Bank of Canada’s preferred measures for CPI-median and CPI-trim declined slightly from April to May but remain higher than economists’ expectations. The central bank may decide to wait longer before considering another rate hike. Economic releases such as the June jobs report and the Bank of Canada’s business outlook survey will provide further insight into inflation trends. Significant signs of slowing will be necessary for the central bank to pause its rate hikes.
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