Canadian policymakers received a welcomed relief from the latest inflation figures reported on Monday. In May, the year-over-year inflation rate spiked to 3.2%, driven by a 33.2% increase in gasoline prices and higher grocery prices, particularly in produce which relies heavily on diesel for production and transportation. Tomato prices surged by 45.2%.
While consumers faced challenges navigating a weak economy, the silver lining was that the price spikes were mainly concentrated in energy-related sectors. According to Michael Davenport, a senior economist at Oxford Economics, it is likely that headline inflation peaked in May as gasoline prices have already dropped approximately 10% from their peak the previous month.
Economists monitor core inflation indicators, excluding volatile components, to gauge underlying trends. Davenport noted that there were no significant signs of widespread inflation across the Consumer Price Index (CPI) basket, with both of the Bank of Canada’s preferred core inflation measures holding steady at around 2% year over year.
Despite the temporary relief in energy prices, challenges persist. Although the international oil benchmark, Brent crude, has decreased from its April peak of $118 to $77, it remains substantially higher than pre-war levels. The ongoing conflict involving the U.S., Israel, and Iran has disrupted oil prices, raising concerns about the prolonged impact on inflation.
Economist Jim Stanford from the Centre for Future Work emphasized that even if the Strait of Hormuz reopens, the repercussions on prices and inflation will endure for months. The sustained high energy costs increase the likelihood of businesses passing on these additional expenses to consumers, affecting various sectors such as airfares, travel, food, and delivery charges.
The latest data for May reflected rising transportation and food costs, with tomatoes at the forefront. Statistics Canada attributed the significant increase in tomato prices to supply disruptions in Mexico caused by adverse weather conditions and reduced acreage due to U.S. tariffs.
While May’s inflation surge exceeded expectations, the majority of price hikes were within predictable sectors. The decline in gasoline prices observed recently will likely reflect in next month’s CPI data. However, as long as energy prices remain elevated compared to pre-war levels, there is apprehension that businesses may transfer these added costs to consumers.