Energy Prices Expected to Push Canada's Inflation Higher in May

Canada is bracing for a potential increase in its inflation rate for May, with high oil and gasoline prices expected to be the main drivers. Statistics Canada is set to release its consumer price index on Monday, and economists will be scrutinizing the details for any indication that rising fuel costs are impacting other sectors of the economy.

Andrew Hencic, a senior economist at TD Bank, noted that while gasoline prices climbed in May, oil prices have recently retreated from their peaks. This decrease followed a memorandum of understanding between the U.S. and Iran aimed at ending their conflict and reopening the Strait of Hormuz. However, the final terms of that agreement are still being negotiated.

Hencic emphasized that the broader economic picture is more critical than the headline inflation number. "Everybody’s gone to the gas station and saw the price when they went to fill up the tank. But it’s more than just that," he stated. "If those core measures continue to be well-behaved, then we don’t see a significant pickup in inflation across a broader set of goods and services. That’s really what we’re looking for."

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Everybody’s gone to the gas station and saw the price when they went to fill up the tank. But it’s more than just that. If those core measures continue to be well-behaved, then we don’t see a significant pickup in inflation across a broader set of goods and services. That’s really what we’re looking for.

Last month, Canada's annual inflation rate stood at 2.8%, up from 2.4% in March, largely due to a 19.2% surge in energy prices. Excluding gasoline, the consumer price index rose 2% in April. Economists surveyed by LSEG Data & Analytics anticipate the annual inflation rate reached 3% in May.

The Bank of Canada, which targets a 2% inflation rate, has observed limited evidence of higher energy prices broadly affecting other goods and services. While acknowledging the impact of the Middle East conflict, the central bank has indicated it will not allow energy price hikes to lead to persistent inflation. RBC economist Abbey Xu noted that the bank's preferred core inflation measures remain around 2%, suggesting that underlying inflation is more subdued than headline figures indicate. RBC forecasts a year-over-year inflation rate of 3% for May.

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The more important question is whether higher energy costs start spreading through the rest of the consumer basket and so far, our expectation is that underlying inflation remains considerably more subdued than the headline numbers suggest.