May Canadian inflation fell to 3.4% y/y from 4.4% in a sharp drop that will extend into June.
That will give the Bank of Canada some leeway to wait longer before hiking rates again, according to economists at CIBC.
"While food price increases remained strong, tamer core readings of inflation point to some light relief for Canadian consumers," they write. "Overall, today's data don't change the fact that inflation is running hotter than the Bank's prior April MPR forecasts. However, the tamer core readings suggest that policymakers may be able to wait a little longer rather than following up June's hike with another move as early as July, and we therefore continue to expect policymakers to wait until September to deliver a final 25bp hike."
That forecast leans against market pricing, which is at 60% for a July 12 hike (compared to 65% before the data). This is the final inflation report before the Bank of Canada decision.
June CPI is almost certain to fall again with gasoline prices down nearly 30% y/y but base effects begin to fade afterward and CPI notes that inflation could accelerate again later int he year "particularly if food prices continue to climb."
The good news on that front is that grains prices and futures in soft commodity markets have fallen.
A big source of inflation for Canadians is now mortgage rates, exclude those and inflation is running at just 2.5% y/y.
From where I stand there is no reason for the Bank of Canada to keep hiking rates. They're said to be worried about rising housing prices but that's clearly a supply and immigration issue.
As for the Canadian dollar, there are tailwinds from the idea of a stronger global economy but that sentiment is going to have to spill over into commodity markets if this breakout is going to continue.
