In Canada, inflation reached levels not seen since 1983 in May. We believe that the CPI data make a 75 basis point interest rate hike at the next meeting a near inevitability, with rates peaking at more than 2.75 percent.
There was no relief in May for those of us who had grown tired of rising inflationary pressures. The headline CPI increased by 1.4 percent month over month, raising the annual rate from 6.8 percent to an even more gravity-defying 7.7 percent (consensus +1.0 percent m/m, 7.3 percent y/y). While food and energy drove much of the headline increase during the month, price pressures in booming services meant that inflation was relatively high even when food and energy were excluded. The persistence of significant and broadly based price pressures makes a 75bp boost from the Bank of Canada a near certainty, and it is probable that the peak in interest rates will be higher than previously predicted.
With little relief from high fuel costs on average in June, and food prices set to rise more, headline inflation should easily exceed 8% next month. However, with commodity prices beginning to decline on fears of a worldwide slowdown, inflation should begin to moderate in late summer and early fall. Headline CPI was already running well over the Bank of Canada’s April estimates prior to today’s data, so a 75bp hike at the next meeting is a near certainty, and the peak in interest rates may be higher than the 2.75 percent we expected previously.