Inflation in Canada slowed in May to 3.4 per cent, matching economist estimates, but many don’t think that will be enough to convince the Bank of Canada to back away from another interest rate hike at its next meeting on July 12.

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May’s consumer price index (CPI) increase was the smallest since June 2021, Statistics Canada said in a release on June 27. The CPI slowed a full percentage point from an unexpected acceleration in April of 4.4 per cent. Monthly inflation grew 0.4 per cent in May, or 0.1 per cent on a seasonally adjusted basis.

“The Bank (of Canada) will still be pleased to see that the CPI rose by just 0.1 per cent month over month this May and that the monthly gains in CPI-trim and CPI-median (the bank’s preferred inflation measures) each slowed to 0.2 per cent,” Stephen Brown, deputy chief North American economist at Capital Economics, said in a note.

There were other signs of inflation retreating, Charles St-Arnaud, chief economist with Alberta Central, said in a note.

For example, the number of components included in the CPI that rose between three and five per cent in May continued to shrink meaning inflation is less broad-based in the economy, St-Arnaud said.

However, economists said the year-over-year readings for the Bank of Canada’s preferred inflation measures remain stuck well above the bank’s two per cent target.

“No matter how you slice it, inflation remains a serious issue for the BoC,” Benjamin Reitzes of BMO Economics said in a note.

Prior to the inflation release, markets were pricing in a 70 per cent chance of an increase at the central bank’s July meeting. Post-announcement, that fell to 60 per cent, according to Bloomberg.

There is still plenty of important data to come that will factor into the Bank of Canada’s decision-making on July 12 including GDP for April and the central bank’s Business Outlook Survey, both out on June 30. The June jobs report will be released on July 7.

Here’s what economists are saying about the latest inflation numbers and what they could mean for the Bank of Canada.

Stephen Brown, Capital Economics

“While the steep declines in both headline and core inflation in May were partly due to favourable base effects, the monthly gains in each also slowed compared to April. That probably won’t be enough to persuade the Bank of Canada to stand pat at its meeting next month, but it does add to our sense that the bank will not be forced to raise interest rates beyond five per cent, implying just one more 25 basis-point hike.

Maria Solovieva, TD Economics

“Canadian inflation continued to cool in May, but progress is unlikely to be enough to prevent the Bank of Canada from raising rates in July. Improvements in core inflation are slow, particularly on the services side, with inflation picking up in discretionary areas like travel services and restaurant meals (6.8 per cent year over year in May). Cooler goods inflation is welcome, but the BoC has likely been counting on that already as supply chain snarls improve.

“Looking at the bank’s core measures, governor (Tiff) Macklem may have a Bon Jovi earworm, humming, ‘whoa, we’re half way there.’ But, there is still a ways to go to get inflation all the way back to two per cent. And the bank would rather not be ‘livin’ on a prayer,’ and is likely to take rates another quarter point higher in July to ensure demand, and hence price pressures cool further.”

Benjamin Reitzes, BMO Economics

“While the softer-than-expected core prints are a bit of good news, every inflation metric remains far above the two per cent inflation target. Accordingly, Bank of Canada policymakers won’t breathe a huge sigh of relief after this report as core inflation remains sticky and has yet to show signs of a durable slowdown. The odds of a July rate hike might be slightly lower now, but if the rest of the data hold up over the next two weeks, a hike still looks likely.”

Jay Zhao-Murray, currency analyst, Monex Canada

“The breadth of inflation fell, with around half of the components running above target in May, compared to roughly three-quarters when averaged over the past three months. This could be an early sign of cooling price pressures after months of re-acceleration, but the fact remains that the monthly pace of price increases was still twice as strong as it would be if inflation were back to normal and the underlying core measures remain too high for comfort. For this reason, we do not think this single improved report is enough to prevent the Bank of Canada from hiking rates again in July, but it reduces the risk that they will take the overnight rate above five per cent. This merely confirms our view on the BoC’s implied rate path, with the risk of inaction at July’s meeting now centred on the data released over the next two weeks.”

Claire Fan, RBC Economics

“The ‘headline’ inflation rate is likely to fall further in June – potentially down to the top end of the Bank of Canada’s one per cent to three per cent target range – as energy prices this year continue to compare to very high year-ago levels. Beyond that, further slowing in broader inflation readings all the way back to the two per cent target will be much harder to come by.

“Although slowing, underlying inflation trends in Canada are still running well-above the BoC’s two per cent target. Higher interest rates are cutting into household purchasing power, but spending to-date has been firm. Labour market conditions are also more resilient than expected in 2023 to-date. GDP data and the BoC’s own Q2 Business Outlook Survey later this week will be watched closely for signs that the economy is losing momentum. But absent a large downside surprise from those data releases, we continue to expect the bank to hike the overnight rate by another 25 basis points in July, before stepping back the sideline for the rest of this year.”

Charles St-Arnaud, Alberta Central

“Inflation continues to moderate but remains well above the BoC’s target of two per cent, while inflation expectations remain elevated and inflationary pressures remain broad and likely sticky. The BoC is likely to consider the recent inflation dynamic, as measured by the three-month annualized changes, slightly concerning and could support another increase in interest rates at the July meeting.

“However, higher interest rates are having a significant impact on inflation. We estimate that inflation excluding food, energy and mortgage interest payments is about 2.3 per cent and its three-month over three-month annualized change is around 2.5 per cent. This means that excluding the impact of the rate hikes, underlying inflation is in line with the BoC’s target and would not support further rate increases.

“Ultimately, whether the BoC hikes in July may hinge on the strong momentum in the economy, with the strong labour market and consumer spending, and the desire of the BoC to restore its credibility as an inflation fighter and influence inflation expectations.”

David-Alexandre Brassard, chief economist, CPA Canada

“Inflation is coming in lower than expected for May 2023. The month-over-month variation (0.4 per cent) is more indicative of the remaining inflation than the year-over-year variation due to the inflationary spike of May 2022. The pressure on prices is coming from service industries: strong service consumption is driving demand and constrained labour is impairing supply. It remains a coin toss whether the Bank of Canada will implement an additional hike in July.”