Canada CPI at 3.2%: Gas Hike Masks Weak Economy, Economists Say

Canada's annual inflation rate accelerated to 3.2% in May, breaching the Bank of Canada's 1-3% target range for the first time this year, Statistics Canada reported Monday. The consumer price index jumped from 2.8% in April as gasoline prices surged 33%.

Despite the headline overshoot, economists expect this to mark the peak. Andrew Grantham at CIBC Capital Markets called the data "old news" in a note, pointing out that oil and gasoline prices have already retreated from their earlier highs. Excluding gasoline, annual inflation ran at 2.2% in May, up from 2% in April, with vacation tours and airfares adding pressure as airlines passed on fuel costs.

Grantham sees a 3.0% June print ahead, as gasoline prices fall amid U.S.-Iran nuclear talks. Core inflation, the Bank of Canada's preferred measure, could stay elevated for another month or two due to summer travel and the ongoing World Cup, he said. CIBC expects policymakers to hold interest rates for the rest of the year.

Ali Jaffery, chief economist at KPMG Economics, pointed to energy and food as the main drivers in May. Food price increases were mostly in bananas and tomatoes, in line with that category's trend, he said.

The data reinforces a market view that the central bank's next move is a cut, not a hike, though not until 2026. Canadian two-year bond yields rose on the headline then retraced gains as economists leaned into the peak-inflation story. The Canadian dollar was little changed near 1.3565 per U.S. dollar.

The full breakdown is in Canada CPI Hits 3.2% in May, Dashing Rate-Cut Hopes. The June CPI report is due in mid-July, and the Bank of Canada's next rate decision is scheduled for July 16.