Canadian policymakers found some relief in the latest inflation data released on Monday. The year-over-year inflation rate jumped to 3.2% in May, driven by a 33.2% increase in gasoline prices and rising grocery costs, particularly in produce, which relies heavily on diesel for production and transportation. Tomato prices saw a significant spike of 45.2%.
Despite the challenges faced by consumers in a sluggish economy, the silver lining is that the inflation surge was mainly concentrated in energy-related sectors. According to Michael Davenport, a senior economist at Oxford Economics, headline inflation likely reached its peak in May, with gasoline prices already dropping approximately 10% from their recent highs.
Economists monitor core inflation indicators that exclude volatile components to gauge underlying trends. The Bank of Canada’s preferred core inflation measures held steady at around two percent year over year, indicating no significant broadening of inflation across the consumer price index basket.
Although energy prices have moderated since their peak, concerns remain. Brent crude oil prices, a key global benchmark, rose to $118 US in April during the U.S., Israel, and Iran conflict, but have since decreased to $77. This level is still substantially higher than the $60 price in January before the conflict began. Ongoing uncertainties around the Strait of Hormuz’s operations could sustain elevated energy prices, potentially leading businesses to pass on these cost increases to consumers.
Jim Stanford, an economist at the Centre for Future Work, highlighted the prolonged impact of high energy prices on businesses, which could result in price hikes for consumers. Recent data showed increases in transportation costs, travel expenses, and food prices, particularly tomatoes. Statistics Canada pointed out that the surge in tomato prices was influenced by supply disruptions in Mexico due to adverse weather conditions and reduced acreage following U.S. tariffs.
The May inflation figures exceeded expectations, but the majority of price hikes were concentrated in predictable sectors. While gasoline prices have already started to decline, ongoing concerns persist regarding businesses transferring additional expenses to consumers as long as energy prices remain elevated post-conflict.