According to Statistics Canada, Canada’s inflation rate in May grew by 1.7% year-over-year and flat compared to April. The rate was influenced by the relaxation of the carbon tax and ongoing tariffs, says Abbey Xu, economist at Royal Bank of Canada. “The year-over-year reading continued to be distorted by the carbon tax removal, which is still lowering the after-tax price of consumer energy products from a year ago,” said Xu in a client note. “Excluding the impact of indirect tax changes, Consumer Price Index (CPI)-trim and CPI-median edged lower to 3%, offering a clearer view of underlying price growth and still above the Bank of Canada’s 2% inflation target.” “We continue to monitor the impact of retaliatory tariffs on consumer prices, particularly for autos and groceries. Early signs of price hikes were evident in April, and the pace of price increases for new passenger vehicles accelerated further in May but grocery price inflation eased.” "Industrial and raw material prices stayed flat as well, providing reassurance broader input cost growth has been contained," said Xu, adding the inflation rate is the first of two to be released before the Bank of Canada’s next rate announcement on July 30. .“The Bank of Canada appears to have reached the end of its cutting cycle, with the policy rate now in the middle of the neutral range,” she said. “While it has left the door open to further easing, that would likely depend on clearer signs of economic weakness alongside contained inflation.” “In the near term, tariff-related uncertainty could keep after-tax inflation slightly elevated, but we continue to expect it to trend close to target further out.” Outside forces could influence the bank’s decision. “Geopolitical instability in the Middle East has been fueling volatility in oil markets, however, the elimination of the carbon tax will continue to keep energy prices subdued compared to levels from a year ago,” said Xu.Of note were the effects on housing, she said. “Inflation within the shelter category eased again in May, as mortgage interest costs inched lower, though they remain elevated,” said Xu. “With shelter now accounting for a larger share of the CPI basket (29.4%), inflation pressures in this category will carry slightly more weight in headline readings going forward.” “Growth in home rental prices slowed to 4.5% year-over-year in May, down from 5.2% in April, half of the 9% peak reported in May 2024 and aligns with levels last observed in mid-2022.”
