May Inflation of 7.7% in Canada, highest level since 1983; USD / CAD holds gains


  • May Consumer price index rises 1.4% mother, five tenths percent above estimates. The annual rate, on the other hand, rises to 7.7%, the highest level in almost 40 years.
  • Core inflation is also rising by 0.8% mother and 6.1% year-on-year tops expectations
  • USD / CAD holds daily gains after Canadian CPI report crosses the threads, but the movement is associated with risk matching and falling oil prices

Most read: Central Bank Watch – Bank of Canada, RBA and RBNZ interest rate expectations

Price pressures intensified last month in Canada, exacerbated by rising energy and food costs, further eroding consumer purchasing power and increasing the risk of Inflation is becoming seriously entrenched in the economy, a situation that could lead to more aggressive monetary tightening in the coming months.

According to Statistics Canada the consumer price index, which measures a comprehensive basket of goods and servicesincreased by 1.4% on a monthly basis in May, increasing the annual reading to 7.7%, the highest level since January 1983, a figure almost four times the central bank’s target of 2 per cent. Analysts surveyed by Bloomberg News had expected the overall CPI to rise only 1.0% mother and 7.4% yoy.

The details in the report showed that energy contributed the most to the month increase as this category increased by 8.5% mother on the back of one 12% mor increase and gasoline. With prices at the pump increases further in the first half of June, energy consumption will remain biased in the short term, which suggests to overall index may exceed 8% later in the year before topping.

Core CPI, which excludes energy and food and tends to reduce transient noise created by volatile objects, increased 0.8% mother and 6.1% year-on-year. The annual rate was the hottest print since the series was introduced in 1999, a sign that price pressure is widespread and affecting even more sticky components of the CPI curve.

Faced with expand inflationary forcesthe Bank of Canada may be inclined to continue to accelerate interest rate hikes at future meetings to restore price stability, especially since the resilience of economic activity gives policy makers room to be aggressiveat least for now. Against this background, the BoC is likely to raise borrowing costs by 75 bps to 2.25% at the merger in July, delivering the largest increase in 24 years.

BoC Governor Tiff Macklem said a few weeks ago that a benchmark rate of 3% or higher is not out of the question. Today’s CPI report is likely to reinforce expectations that institution will have no choice but to move monetary policy in restrictive area in his efforts on tame red-hot inflation.

A hawkish tightening cycle from BoCcorresponding to it Federal Reservewill prevent interest rate differentials between US and Canadian debt from widening, providing support for the Canadian dollar as long as sentiment improves and global markets stabilize.

The USD / CAD kept morning gains and traded close to 1.2980 immediately after the Canadian CPI report crossed the threads where the gains were attributed to risk matching and falling oil prices. However, once the risk appetite has recovered, the Canadian dollar may be able to rise moderately against the dollar.


USDCAD three minute chart

Source: TradingView


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— Written by Diego Colman, Marketing Strategist for Technewscity