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Tags: Canada, Consumer Price Index, Inflation, USDCAD
Canada’s annual inflation rate increased to 2.9% in May 2024, up from a three-year low of 2.7% in April. The rise contradicted market expectations of a slowdown to 2.6%. While the inflation rate aligns with the Bank of Canada’s forecast of inflation staying near 3% in the first half of 2024, the halt in the disinflation trend challenges expectations of continued monetary policy loosening.
Several key factors contributed to the inflation increase. Transportation costs rose 3.5%, up from 3.1% in April, driven by a 4.5% increase in air transportation prices. Food prices increased 2.4%, compared to 2.3% in the previous month, with grocery costs rising 1.5%, up from 1.4% – marking the first acceleration since June 2023.
Health and personal care costs grew faster at 3.6%, up from 3% in April. Household operations, furnishings, and equipment costs fell by a smaller margin (-1.5% vs -2.1%). Shelter costs remained high at 6.4%, though not increasing further. Overall, the Consumer Price Index (CPI) rose 0.6% month-over-month.
Following a surprise increase in Canadian inflation, the Canadian dollar strengthened to 1.365 per USD, reaching its highest level since June 3rd. Earlier in the month, the Bank of Canada reduced its key interest rate by 25 basis points to 4.75%, indicating potential further rate cuts if inflation continued to slow as anticipated. However, the unexpected resurgence in inflation may prompt the Bank of Canada to adopt a more cautious approach regarding additional rate reductions.
(Inflation Rate YoY%,Statistics Canada)
(USDCAD Daily Chart)
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