Canada's May CPI hit 3.2%, topping the 2.9% consensus and the BoC's 1-3% target band. Rate-cut odds for July collapsed below 15% after the print.
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Canada's annual inflation rate accelerated to 3.2% in May, topping the 2.9% consensus estimate and the 2.7% reading from April. The print, released by Statistics Canada on Tuesday, marks the first time headline CPI has breached the 3% threshold since August 2024.
Core inflation measures also firmed. The Bank of Canada's preferred trim and median core rates both rose, with the trim measure hitting 3.1% and the median core climbing to 2.9%. Month-over-month, the CPI rose 0.6%, driven by higher gasoline prices and shelter costs.
The data complicates the BoC's policy path. Markets had priced in roughly a 40% chance of a rate cut at the July 16 meeting before the release. Those odds collapsed to below 15% after the print, according to overnight index swap pricing. The Canadian dollar strengthened 0.4% against the U.S. dollar, trading near C$1.3650.
Governor Tiff Macklem and the governing council have held the overnight rate at 4.75% since January, after cutting 75 basis points from the 5.0% peak reached in 2023. The May CPI report is the last major data point before the July decision. The next scheduled release is the June jobs report on July 11.
Energy prices accounted for roughly half the headline overshoot. Gasoline rose 6.8% year-over-year, while natural gas climbed 4.2%. Shelter costs, including mortgage interest and rent, added 0.15 percentage points to the monthly gain. Food prices moderated slightly, rising 2.1% annually versus 2.3% in April.
The acceleration extends a trend that began in March, when CPI bottomed at 2.5%. Since then, three consecutive monthly increases have pushed the headline rate above the BoC's 1-3% target band. The central bank's next quarterly Monetary Policy Report, due July 16, will include updated inflation forecasts.
Traders said the print reduces the likelihood of a July cut to near zero, with the first full 25-basis-point cut now priced for October. The Canadian two-year yield rose 12 basis points to 3.84%, the highest since March. The five-year yield climbed 10 basis points to 3.52%.
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