Canada's annual inflation rate in May remained at 1.7%, unchanged from the previous month, as gasoline prices continued to fall and costs in the housing, food and transportation categories fell, data showed on Tuesday.
Concerns that a series of tariffs on steel, aluminum and automobile exports to the United States, as well as Canada's retaliatory measures, will push up prices across the board have not yet been reflected in the headline consumer price index. A tax cut on gasoline implemented since April is expected to keep the fuel at a year-low level.
Lower interest rates have also consistently reduced mortgage interest costs, while weak demand has pushed rents down in recent months.
Analysts polled by Reuters had expected annual inflation to remain at 1.7% in May, while monthly inflation was expected to be 0.5%. However, Statistics Canada (StatsCan) reported monthly inflation at 0.6%, largely driven by seasonal increases in travel, accommodation and energy costs. Gasoline prices fell 15.5% year-on-year in May after falling 18.1% in April.
The shelter component of the CPI, which has the highest weight at 30%, rose 3% in May, down from 3.4% in April, in line with a decline in mortgage and rental rates.
The Bank of Canada focused on its core inflation measures CPI-trim and CPI-median, both of which fell to 3%, the top of the central bank's inflation target range of 1% to 3%. The CPI-median represents the middle price component of the CPI basket, while the CPI-trim excludes drastic price changes.
The May inflation data is considered important because it will influence the Bank of Canada's interest rate decision on July 30. The bank will also receive June inflation data before making its next decision. If inflation remains low, it could prompt monetary easing.
After aggressively cutting interest rates for nine consecutive months since June last year by 225 basis points to 2.75%, the BoC has halted its rate-cutting cycle at its last two meetings, largely due to uncertainty over trade tariffs.
Money markets are now pricing in a roughly 62% chance that the Bank of Canada will keep rates on hold at 2.75% on July 30, the date that also sees the release of its monetary policy report. The Canadian dollar edged lower after the data, trading 0.1% higher at 1.3717 against the U.S. dollar, or 72.90 U.S. cents. The two-year government bond yield rose 0.8 basis points to 2.621%.
