Canadian policymakers breathed a sigh of relief as Monday’s inflation figures were released. In May, the year-over-year inflation rate jumped to 3.2%, 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 surged by 45.2%.
Despite the challenges faced by consumers in a sluggish economy, the spike in prices was mainly confined to energy-related sectors. According to Michael Davenport, a senior economist at Oxford Economics, headline inflation likely peaked in May, with gasoline prices already decreasing by around 10% since reaching their highest point the previous month.
Economists analyze core inflation measures, which exclude volatile components, to assess underlying trends. The Bank of Canada’s preferred core inflation indicators remained stable at approximately 2% year over year, indicating no significant broadening of inflationary pressures across the consumer price index basket.
Nevertheless, Canada still faces uncertainties. While energy prices have moderated from their peak levels, Brent crude, the primary global oil price benchmark, climbed to $118 US in April due to geopolitical tensions before declining to $77 at the start of this week. This is significantly higher than the $60 price tag in January, with ongoing concerns about the disruption in the Strait of Hormuz.
Economist Jim Stanford from the Centre for Future Work warned that even if the Strait of Hormuz were to fully reopen, which is unlikely in the near term, the repercussions on prices and inflation would persist for months. The prolonged high energy prices could prompt businesses to pass on these increased costs to consumers, especially as companies consume twice as much petroleum as individual consumers, leading to broader impacts.
The recent data for May indicated rising transportation expenses, increased travel and tourism costs, and higher food prices, particularly driven by tomatoes. Statistics Canada clarified that the notable increase in tomato prices was influenced by supply constraints in Mexico resulting from adverse weather conditions and reduced planting acreage due to U.S. tariffs.
Although May’s inflation surge exceeded expectations, the majority of price hikes were concentrated in predictable sectors of the economy. While gas prices have already started to decline, ongoing elevated energy costs post-war raise concerns that businesses may transfer these additional expenses to consumers.