Despite the Consumer Price Index falling a full percentage point from April to May, inflation is still high in Canada, and most economists expect the Bank of Canada to raise its rate again manager next month.

After resurging in April, the inflation rate resumed its deceleration in May, once again mainly due to the drop in energy prices. The Consumer Price Index (CPI) is closing in on the Bank of Canada’s 2% target, but the rest of the way looks rocky given the strength of the economy and the resilience of the market labor market, despite nine key rate hikes.

The CPI slowed from 4.4% in April to 3.4% in May on an annual basis to reach its lowest level since June 2021, Statistics Canada reported on Tuesday. This news is not as good as it looks, because the marked slowdown in the annual rate of inflation is mainly explained by the comparison with the sharp rise in prices in May 2022, the so-called basic effect. On a month-to-month basis, the CPI is up 0.4%, in line with observers’ expectations.

In Quebec, monthly inflation is up 0.7% in May and the annual increase slowed from 4.8% in April to 4% in May, which is above the national average.

Despite lower international commodity prices, food inflation remains high at 8.3%. This figure includes grocery store prices, up 9%, and restaurant prices, which are up 6.8% on an annual basis.

“Food inflation is likely to ease, but it will be difficult for consumers for some time to come,” commented BMO economist Benjamin Reitzes.

Along with food, rising mortgage rates also contributed to higher prices in May. The mortgage interest cost index, up 29.9%, was the main factor behind the year-over-year increase in the CPI, according to Statistics Canada.

The slowdown in annual price increases was largely driven by lower gasoline prices, which were inflated last year by the impact of Russia’s invasion of Ukraine.

Durable goods price growth continues to slow as supply chains return to normal. Furniture prices, for example, are down 2.9%, while car prices continue to rise, but at the slowest pace since February 2021.

On the service side, cellular plan prices were down 8.2% year over year, while travel-related services, such as accommodation, were up and contributed to the increase in the base index. The May CPI reflects a basket of goods and services that has been updated by Statistics Canada. The weight of food and gasoline is larger in the new index weighting. DVDs were eliminated and digital subscription services were added, among other changes.

According to Desjardins economists, the new weightings had a slight upward effect on the inflation results for May.

At 3.4%, the annual inflation rate is now very close to the Bank of Canada’s forecast, which was 3% this summer. This forecast should be good, according to National Bank economists, who estimate that CPI inflation should slow further next month (June), before the next interest rate decision scheduled for July 12.

The core inflation measures monitored by the Bank of Canada (IPC-Tronq and CPI-Med) are also improving, but not enough to the liking of monetary authorities, according to several economists. Despite this improvement, we are still far from the 2% target and “inflation is still a serious problem for the Bank of Canada,” said Benjamin Reitzes of BMO.

For Desjardins economist Randall Barlett, demand is still too strong to expect a return to the 2% target soon. The Canadian economy is expected to grow at an annual rate of 2% in the second quarter, which is twice as high as the Bank of Canada’s forecast of 1%, he notes.

“We continue to believe that the Bank of Canada will raise the policy rate another 25 basis points in July (to 5%) while leaving the door open for further tightening if the data does not cooperate this summer. “, he predicts.

The Quebec economy ended the first three months of the year with solid growth of 1.7%, which still thwarts forecasts of an upcoming recession. This is the tenth quarterly increase in 11 quarters, said National Bank economist Daren King.

Quebecers continued to consume briskly, which explains the good performance of the economy. The financial assistance paid by the Legault government to deal with the increase in the cost of living has stimulated consumption since the end of 2022, but this momentum is coming to an end, according to him. The disposable income of Quebecers is returning to normal and the household savings rate has fallen from 12.2% to 6.3%, below its pre-pandemic level. “Quebecers are starting to dip into their woolen stockings to maintain their rhythm of life,” notes the economist.

“Consumer spending won’t be able to maintain this pace for very long,” said Desjardins economist Hélène Bégin, who believes that this 1.7% growth in the first quarter could be “the last breath before more negative results” .