Canadian headline inflation unexpectedly accelerated last month, and the underlying price indicators followed most closely by the Bank of Canada jumped – making a back-to-back rate cut at the central bank’s July meeting much less likely. Data released by Statistics Canada this morning showed the Consumer Price Index rising 2.9 percent on a year-over-year basis in May, up from the 2.7 percent increase recorded in April, and well above the 2.6-percent consensus expectation. On a month-over-month basis, prices increased 0.6 percent.

The print incorporated new consumer price index basket weights, but the statistical agency noted that the headline gain would have been the same if 2022 weights were used.

Shelter costs remained the biggest contributor, adding 1.87 percentage points to the headline, but services inflation also drove some of the acceleration, rising 4.6 percent year–over-year, speeding up from 4.2 percent in the previous month.

Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 2.85 percent over the same period last year, up from a revised 2.7 percent average in the prior month. The older “CPI-X” measure, which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components, climbed 1.8 percent over last year, also up from 1.6 percent previously. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.

Swap-implied odds on a cut at the Bank of Canada’s July meeting are falling below pre-release levels, triggering a modest rally in the Canadian dollar against the greenback.

Bottom line: With a sustained moderation in the Bank of Canada’s preferred measures of inflation hitting a speed bump, the stage is set for a quarterly pace of easing in the year ahead. Another inflation print will land before policymakers meet in July, but we suspect an abundance of caution will see the next move land in September, matching the timing of the first rate cut from the Federal Reserve. Speaking with reporters after a speech yesterday, Governor Macklem suggested that rate cut expectations were “reasonable” and said “We don’t want monetary policy to be more restrictive than it has to be,” but warned that lowering borrowing costs “too quickly” could reinvigorate inflation pressures.