Canadian policymakers breathed a sigh of relief with the latest inflation figures released on Monday. In May, the year-over-year inflation rate surged to 3.2%, driven by a 33.2% increase in gasoline prices and rising grocery costs, particularly in produce due to high diesel usage for cultivation and transportation. Tomato prices spiked by 45.2%.
Despite the strain on consumers in a weakened economy, the spike in prices was primarily contained within the energy and energy-sensitive sectors. According to Michael Davenport, senior Canada economist at Oxford Economics, headline inflation likely peaked in May as gasoline prices have already dropped by about 10% from their previous peak.
Economists monitored core inflation indicators that exclude volatile components to gauge underlying trends. Both of the Bank of Canada’s preferred core inflation measures remained stable at around two percent year over year.
Although energy prices have decreased from their peak levels, Brent crude, the main international oil benchmark, rose to $118 US in April during the conflict between the U.S., Israel, and Iran. It has since retreated to $77, still significantly higher than pre-war levels of $60 in January. Uncertainties surrounding the Strait of Hormuz operations persist, prolonging the impact on prices and inflation.
Economist Jim Stanford from the Centre for Future Work highlighted that businesses, which use double the amount of petroleum compared to consumers, may transfer the increased energy costs to consumers over time. The spillover effects were already evident in various sectors, including transportation, travel, and food prices, with produce being notably affected by diesel-related costs.
May’s inflation data showed rising transportation costs, increased travel and tourism expenses, and higher food prices, especially tomatoes. Statistics Canada noted that the surge in tomato prices was influenced by supply disruptions in Mexico due to adverse weather conditions and reduced acreage following U.S. tariff implementations.
While May’s inflation spike exceeded expectations, the price hikes were predominantly concentrated in anticipated sectors. As gas prices have already started to decline, the subsequent CPI data is expected to reflect this trend. However, concerns persist that businesses may continue passing on additional costs to consumers as long as energy prices remain elevated compared to pre-war levels.
