WTI Crude Retreat Ends Energy-Driven Inflation Spike, Core Elevated
WTI crude falls to $70, unwinding its geopolitical premium. Headline inflation eases after energy costs drop. Core inflation stays near 2%, keeping the BOC on hold. Next week's Canadian GDP and US payrolls in focus.
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WTI crude has fallen back to around $70 a barrel, unwinding most of the geopolitical premium built up since the Strait of Hormuz closure. The decline, if sustained, removes the biggest driver of the recent headline inflation spike in both the US and Canada.
May's CPI hit 3.2% year-on-year, up from 2.8% in April. The acceleration came almost entirely from gasoline and airfares. Core measures barely budged. The Bank of Canada's preferred core indicators sat near 2% on a three-month basis, and inflation breadth remained contained. Outside energy, the data looks like an economy running below potential.
If oil stays at $70, headline inflation will fall in coming months. Core inflation may stay elevated for two to three months because energy costs take time to feed through the broader economy. Governor Macklem, speaking in Paris, said the bank's preferred core measures have shown little movement and described inflation as concentrated rather than broad-based.
The macro signal is competing with sector-specific noise. Alphabet's personnel moves triggered a sell-off that spread through the AI complex and then partially reversed. The S&P 500 ended the week down 1.8%. Treasury yields edged lower after the energy retreat dimmed the reflation narrative.
The ceasefire MOU with Iran is promising. Maritime traffic through the Strait of Hormuz is still below normal. A slower-than-expected reopening or a negotiation snag would reverse the oil retreat just as quickly. The risk to oil prices remains skewed to the upside.
The May PCE print confirmed the energy feedthrough. Overall PCE inflation hit 4.1% year-on-year; core rose to 3.4%. Real spending rebounded in May after a weak April. The savings rate stayed at 3%, far below the historical 5-6% average. Tariff-related cost pressures may be weighing on households' ability to rebuild savings, which could constrain spending later in the year.
Attention turns to two data points next week. Canada's April industry GDP is due, with a flash estimate of 0.4% month-on-month. That would put the economy on a 1.9% annualized growth path in Q2, consistent with a soft patch rather than a recession. In the US, June payrolls are expected to show 118k new jobs, a moderation from May. Fed Chair Warsh speaks Wednesday.
The US employment report lands Thursday. A reading near consensus would keep the Fed on hold. A miss would revive rate-cut bets and pressure the dollar.
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