Canada’s annual inflation rate rose to 3.2% in May, driven by surging gas prices and increased costs of fresh fruits and vegetables, as reported by Statistics Canada. The spike in gas prices, attributed to an oil shortage resulting from the conflict in Iran, was the primary factor behind the continued uptrend for the month. Gasoline prices surged by 33.2% on a year-over-year basis in May, compared to 28.6% in April, propelling the inflation rate to its highest level since late 2023.
Despite the upward trend, BMO’s chief economist, Doug Porter, pointed out that pump prices have started to decrease in recent weeks, which is expected to lower the headline inflation figure in the upcoming report. Excluding the impact of gasoline prices, the consumer price index still saw a notable increase of 2.2% in May, up from 2% in April, driven by elevated costs of food, recreation, and alcoholic beverages.
The prices of fresh fruit and vegetables saw significant hikes, with fresh fruit prices rising by 5.3% and fresh vegetable prices by 9% compared to the previous year. Notably, tomato prices soared by 45.2% due to adverse weather conditions and reduced crop planting in Mexico following U.S. tariffs, indicating ongoing trade uncertainties affecting the economy, according to Pedro Antunes, chief economist at Signal49 Research.
Vegetable prices experienced the largest May-to-May increase since 2008, rising by 5.5%, attributed to reduced supply and higher fuel expenses. This surge in fresh produce costs contributed to an overall 4.3% year-over-year inflation rate for groceries in May.
Additionally, prices for computer equipment, software, and supplies increased by 3.9% in May, driven by rising costs of random access memory (RAM) and solid-state drives (SSDs) essential for computers. Statistics Canada reported a supply shortage of key computer components due to high demand from artificial intelligence data centers.
Shelter costs saw a slower growth rate of 1.7% year over year in May, balancing out increases in other sectors. Prices for passenger vehicles, tools, and household equipment also experienced slower growth. Analysts had anticipated a three percent annual inflation rate for May, slightly up from 2.8% in April.
While food and energy prices have escalated rapidly, core inflation measures excluding volatile items remained around two percent, aligning with the Bank of Canada’s target inflation rate. RBC economist Abbey Xu highlighted that despite the rise in food and energy prices, inflation in other categories remained subdued, indicating that the impact of gas prices on other goods’ costs was limited.
Nonetheless, BMO’s Porter emphasized the significant impact of persistent food inflation, deeming the overall inflation rate exceeding three percent for a single month as concerning. Porter conveyed in a note to investors that such high inflation rates are generally unfavorable news, emphasizing the need for caution.