In recent news, Canada’s inflation rate experienced a significant decline in May. Economists forecaste a rate hike by the Bank of Canada in July. According to Statistics Canada, the annual inflation rate dropped to 3.4% in May, primarily due to lower gasoline prices compared to the previous year. This marks the lowest inflation rate since June 2021.
Despite this decline, the anticipated decrease in food inflation has yet to materialize fully. Grocery prices remained elevated, rising by nine percent on an annual basis, indicating little improvement from April.
The Bank of Canada, closely monitoring the inflation landscape, is preparing for its upcoming interest rate decision scheduled for July 12. Having recently increased its key rate to 4.75%, the central bank is still inclined towards another rate hike. Economists point out that underlying price pressures, especially in the services sector, remain elevated.
In the coming weeks, the Bank of Canada will consider additional data releases, including a jobs report and a reading on real gross domestic product, before making its rate decision. Barring any significant negative surprises from these releases, RBC economist Claire Fan predicts another 25 basis points rate hike in July, with the possibility of the bank remaining cautious for the remainder of the year.
It is worth noting that Canada has made significant progress in addressing inflation concerns since last summer when inflation peaked at 8.1%. Stephen Gordon, an economics professor at Laval University, suggests that the price shocks resulting from the Russian invasion of Ukraine have largely faded from the year-over-year inflation rate calculation. Gordon emphasizes that inflation is leveling off but at levels that the central bank may find uncomfortable.
Gordon further predicts that the Bank of Canada will raise interest rates to prevent consumers and businesses from becoming accustomed to higher inflation rates. The recent slowdown in the headline rate follows a slight uptick in inflation in April to 4.4%, which partly justified the bank’s previous rate hike.
In the words of Stephen Gordon, an economics professor at Laval University: “On the other hand, inflation is leveling off, but it’s leveling off at levels that the bank would not be comfortable with.”
Looking ahead, the Bank of Canada has indicated that it will base its rate decision on incoming economic data, suggesting a cautious approach. As it assesses inflation pressures, the central bank will pay particular attention to core measures of inflation, which exclude volatile components. These core measures also showed a decline last month.
For Canadian households, the impact of inflation varies depending on individual circumstances. Those with variable-rate mortgages or recent homebuyers, for instance, are facing increased mortgage interest costs. The mortgage interest cost index saw a significant year-over-year increase of nearly 30%.
Households with higher grocery expenses, such as families with children, may also feel the pinch. The Competition Bureau recently published a report emphasizing the need for increased competition in the grocery sector to help mitigate food price inflation and provide more choices for consumers. Concentration within the industry has grown in recent years, and major grocers have seen increased profits from food sales.
At PPS Realty, we understand the challenges that fluctuating inflation rates can pose for Canadian households. As a trusted real estate partner, we strive to provide guidance and support to navigate these economic conditions. Stay tuned for more updates and insights on the evolving real estate market.
