Inflation Holds at 1.7% in May: What It Means for Consumers

May’s inflation numbers showed modest improvement in several of the Bank of Canada’s key price measures — a positive development, economists say, but probably not enough on its own to prompt an immediate cut to interest rates.

Statistics Canada reported Tuesday, June 24, that the annual inflation rate held steady at 1.7% in May. A significant contributor to the easing in headline inflation was a slowdown in shelter costs, which moderated pressures across the consumer price index.

Shelter costs increased by 3.0% year over year in May, down from 3.4% in April, according to StatCan. The agency highlighted Ontario as the primary source of easing rent inflation, noting that slower population growth and a boost in rental supply helped temper rent increases during the month.

Mortgage interest costs continued to decelerate for the 21st straight month, reflecting the effect of lower interest rates set by the Bank of Canada. Economists had generally expected the overall inflation rate to remain about the same heading into Tuesday’s release.

Gasoline prices falling at a slower rate

Statistics Canada noted that the removal of the consumer carbon price has continued to contribute to lower gasoline prices on an annual basis, but the pace of decline slowed compared with last year. A smaller month-to-month reduction in pump prices limited how far gasoline pulled headline inflation down in May.

RBC assistant chief economist Nathan Janzen warned that geopolitical tensions in the Middle East — notably between the United States, Iran and Israel — could restrain the usual seasonal relief Canadians expect at the pumps this summer. If markets fear a wider conflict and the risk of oil production disruptions increases, oil prices could rise, translating quickly into higher retail gasoline prices.

Janzen added that any oil price spike would generally need to persist for several months before it materially affects other consumer prices such as transportation costs and store prices for goods.

The cost of groceries and vehicles is rising

Grocery prices rose 3.3% year over year in May, a moderation of about half a percentage point from the increase recorded in April. Meanwhile, the price of new vehicles accelerated to a 4.9% annual rise in May, driven in part by higher costs for electric vehicles.

Janzen suggested food and vehicle price moves may partly reflect Canada’s ongoing tariff dispute with the United States, though he cautioned it remains early to see widespread, measurable effects from the trade conflict across the full suite of inflation data.

Stripping out the temporary impact of the carbon price removal, StatCan’s inflation measure that excludes tax changes remained steady at 2.3% in May. Bank of Canada Governor Tiff Macklem has said the central bank will pay closer attention to this adjusted gauge as policymakers try to separate one-off and policy-driven effects from underlying inflation trends amid tariff-related uncertainty.

The Bank of Canada’s core inflation metrics, which the central bank watches closely for underlying price pressures, edged down by 0.1 percentage point to 3.0% in May.

The Bank left its policy rate unchanged at 2.75% earlier this month for the second consecutive decision as it waits for clearer signals about the economic impact of shifting trade policy and other factors.

Core inflation is on the right path

BMO chief economist Doug Porter wrote to clients that core inflation is moving in the right direction, but the recent moderation is probably insufficient on its own to convince the Bank of Canada to reduce rates again immediately.

Policymakers will see June’s inflation figures before their next rate announcement on July 30. Porter said that, in his view, the Bank will likely want to see underlying inflation fall below 3% before it feels confident to resume cutting rates. “The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI,” he said.

Financial markets were pricing in approximately a one-in-three chance of a quarter-point cut at the July 30 meeting as of Tuesday afternoon, according to LSEG Data & Analytics.

Statistics Canada also issued a flash estimate for manufacturing sales in May, indicating an early sign of a 1.3% monthly decline following a 2.8% drop in April — a pattern consistent with softening trade-sensitive activity amid the tariff dispute with the U.S.

TD Bank senior economist Andrew Hencic noted the trade tensions are likely to keep the economy subdued in the months ahead, which should ease inflationary pressures. He suggested that the current soft backdrop could give the Bank room to deliver further easing later in the year if conditions warrant more monetary support.

Janzen is more cautious about the case for additional rate cuts. While manufacturing and other trade-sensitive sectors appear weaker, consumer spending has remained relatively resilient and government spending is expected to increase in coming months, which could support growth despite tariffs. “Against that backdrop, our own base-case assumption is no additional interest rate cuts needed from the Bank of Canada,” he said. “But if the economy were to soften more than we expect, there is room for the central bank to step in with more support.”

Read more about inflation:

• How much income do you need to buy a home in Canada?
• Are there tariffs on Canadian goods in the U.S.?
• How Canada’s inflation rate is affecting your finances
• What does high inflation mean for your retirement savings?