Canada’s CPI jumps to 3.2% in May, topping 3% forecast

Though pressure on gas prices from the conflict in the Middle East and closure of the Strait of Hormuz continued to weigh on the headline number, StatCan data revealed that CPI excluding gasoline still accelerated at a 2.2% pace year-over-year in May as compared with April’s 2% increase.

The broadening of price pressures beyond energy is what may concern policymakers most. RBC Economics had forecast headline inflation at 3% for May, citing energy as the largest contributor, with annual gains in that category likely edging higher after jumping to 19% in April. But economists Nathan Janzen and Abbey Xu flagged the limits of monetary policy in responding to the surge: "Energy prices have continued to drive headline inflation higher, but there’s nothing the BoC can do about global oil prices. The central bank would be far more concerned about a broadening of price pressures beyond directly impacted energy prices," they wrote ahead of the release.

That broadening now appears to be underway. The acceleration in the ex-gasoline measure, from 2.0% to 2.2%, suggests underlying demand-side pressures are beginning to build even as the energy shock from the Strait of Hormuz closure does the heavier lifting on the headline. TD Economics similarly flagged this dynamic, noting ahead of the print that "the key question for the Bank of Canada’s policy outlook is whether price pressures are broadening beyond energy."

The Bank of Canada left rates unchanged at its most recent meeting, with its preferred core measures, median and trim CPI, staying close to the 2% target even as headline inflation climbed. May’s data, including the updated core readings from StatCan, will now be scrutinised carefully for any sign that those measures are drifting higher. The May report also incorporates updated basket weights based on 2025 consumer spending patterns, with higher weights for transportation, health and personal care, partially offset by a lower shelter weight, though RBC expected little impact on the total inflation reading from the methodology change.

Financial markets have been watching the loonie closely in this environment. The Canadian dollar hit a 14-month low against the US dollar on Friday, weighed by oil-price declines and weak domestic retail sales data. Ahead of Monday’s open, USD/CAD was last quoted at 1.4154 on Investing.com, near its 52-week high of 1.4194. A hotter-than-expected CPI print could offer the loonie modest support by reinforcing the case for the Bank of Canada to hold rates higher for longer, reducing the interest-rate differential that has been pressuring the currency.

On the equity side, the iShares S&P/TSX 60 ETF (XIU) closed Friday at $51.56, and the Toronto Stock Exchange had not yet opened as of the time of writing, though S&P/TSX Index Futures showed a 0.18% gain by 8:48 AM ET. Rate-sensitive sectors could face headwinds when trading begins, given the upside surprise to inflation.

The relief valve for Canadian inflation may come from global oil markets, however. TD Economics noted that falling crude prices, following a US-Iran interim peace deal and tentative reopening of the Strait of Hormuz, look set to bring some inflation relief in the coming months. Brent crude has fallen roughly 30% from its crisis peak to around $80 per barrel, which should begin flowing through to pump prices and headline CPI in the months ahead.

The next major data point for North American inflation watchers arrives Thursday, June 25, when the US releases its May Core PCE Price Index, the Federal Reserve’s preferred inflation gauge, with the previous reading at 3.3% year-over-year. The PCE data, alongside Wednesday’s final Q1 US GDP reading (forecast at 1.6%), will help frame the broader cross-border rate outlook and add further context to the CAD/USD picture heading into the summer.