Steady May inflation figures don’t make the case for rate cuts: economists

OTTAWA — May inflation figures showed marginal improvements in some of the Bank of Canada’s closely watched price figures — a step in the right direction, some economists say, but likely not enough to convince the central bank to cut interest rates.

The annual pace of inflation held steady at 1.7 per cent last month as cooling shelter costs helped tame price pressures, Statistics Canada said Tuesday.

Shelter costs rose three per cent in May, StatCan said, marking a slowdown from 3.4 per cent in April.

The agency singled out Ontario as the major source of rent relief in the country. Slowing population growth and a jump in new supply helped keep a lid on rent hikes in May.

Mortgage interest costs, meanwhile, decelerated for the 21st consecutive month amid lower interest rates from the Bank of Canada.

Economists had broadly expected inflation would remain unchanged heading into Tuesday.

The removal of the consumer carbon price continues to drive down gasoline costs annually, StatCan said, but a smaller monthly decline in prices at the pump from this time last year limited the drop.

Conflict between the United States, Iran and Israel in the Middle East could limit relief Canadians find at the pumps this summer, warned RBC assistant chief economist Nathan Janzen.

Concerns of wider conflict in the region could spur higher oil prices if markets fear production disruption.

“That is the main passthrough into consumer prices immediately, it really happens at the pump with higher gas prices,” Janzen said of geopolitical instability.

But he noted that the oil price shock — if it comes to pass — would have to last for months before it starts to filter into costs for transportation and prices on the shelf.

The cost of food from the grocery store rose 3.3 per cent annually in May, half a percentage point lower than the hike seen in April.

StatCan said the cost of a new vehicle accelerated in May, rising 4.9 per cent annually, thanks in large part to more expensive electric vehicles.

Food and vehicles are two areas where Canada’s tariff dispute with the United States might be showing up in the inflation data, Janzen said, but he cautioned it’s still too soon to see broad effects from the trade war in price data.

Inflation excluding tax changes — stripping out influences from the carbon price removal — was also steady at 2.3 per cent last month.

Bank of Canada governor Tiff Macklem said last week that the central bank would be paying closer attention to this figure as it tries to look past temporary impacts to see what’s really happening to inflation amid tariffs.

The central bank’s closely watched core inflation metrics, meanwhile, ticked down a tenth of a percentage point to three per cent in May.

The Bank of Canada held its policy rate steady at 2.75 per cent earlier this month for the second decision in a row as it waits for more clarity on the shifting trade policy and its impact.

BMO chief economist Doug Porter said in a note to clients Tuesday that core inflation was moving in the right direction, but likely not enough on its own to convince the Bank of Canada to cut again.

The central bank will get a look at June inflation figures before its next rate announcement on July 30, and Porter said monetary policy-makers will likely need to see underlying inflation drop below three per cent to warrant a return to cuts.

“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.

As of Tuesday afternoon, financial markets were pricing in odds of a quarter-point cut on July 30 at 34 per cent, according to LSEG Data & Analytics.

A separate release from StatCan on Tuesday gave a flash estimate for manufacturing sales in May. Early signs suggest a 1.3 per cent monthly drop, coming off a 2.8 per cent decline in April as Canada’s tariff dispute with the U.S. weighed on activity.

TD Bank senior economist Andrew Hencic said in a note Tuesday that the trade war is likely to keep the economy soft in the months ahead, dampening inflation pressures going forward.

“As has been the case this year, the outlook is heavily dependent on how trade negotiations evolve, but we believe that the soft economic backdrop should give the BoC space to deliver two more cuts this year,” he said.

Janzen is less sure additional interest rate cuts are warranted.

While there are signs of economic weakness in trade-sensitive manufacturing data, he noted that consumer spending has held firm so far in the trade dispute. Government spending is also expected to ramp up in the coming months, he said, helping to support growth in the face of tariffs.

“Against that backdrop, our own base-case assumption is no additional interest rate cuts needed from the Bank of Canada,” Janzen 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.”

This report by The Canadian Press was first published June 24, 2025.