Canada inflation hits two-year high on surging gas prices

Spiking gasoline prices pushed Canadian inflation to its highest level in more than two years in May, while underlying price pressures remained relatively contained and core measures showed little change.

The annual change in the consumer price index (CPI) reached 3.2% in May, Statistics Canada reported on Monday (June 22), marking the highest level since December 2023.

Economists surveyed by Bloomberg had expected a 3% increase, up from 2.8% in April. On a monthly basis, prices rose 1.0%, also above forecasts.

However, core inflation indicators — which exclude more volatile components — suggest that underlying price pressures remain subdued as the economy adjusts to slowing population growth and the impact of U.S. trade policy on exports.

Excluding food and energy, inflation accelerated to 1.6%. Excluding gasoline, the CPI rose 2.2%. The average of the Bank of Canada’s preferred trim and median inflation measures held steady at 2.1%, although on a three-month annualized basis both rose sharply to 2.3%.

Financial markets reacted modestly to the data. The Canadian dollar strengthened to C$1.4157 per U.S. dollar, while the two-year government bond yield rose by about two basis points to 2.795% as of 8:48 a.m. ET. Traders in overnight swaps continue to price in nearly one rate hike by December.

Statistics Canada said the increase was largely driven by energy prices, noting that gasoline rose 33% year over year in May. Air transportation costs also jumped 7.4% after a 1.7% decline in April.

With tensions between the United States and Iran easing, oil prices have begun to fall, and Canadian gasoline prices have returned to their lowest level since mid-March. This trend is expected to put downward pressure on fuel inflation in the coming months.

Earlier this month, Bank of Canada Governor Tiff Macklem said he expected headline inflation to remain near 3% before “easing gradually” toward the bank’s 2% target.

“With oil and gasoline prices now well off their earlier highs, today’s figure should mark the peak,” said Andrew Grantham, senior economist at CIBC, in a note to investors.

“The low starting point for core measures of inflation on a year-over-year basis should enable the Bank of Canada to look through any near-term acceleration and we continue to see interest rates on hold throughout the remainder of 2026.”

At the same time, inflation breadth is narrowing. Around 35% of goods and services in the consumer basket rose at or above 3% annually in May, down from 45% in December, signaling a reduction in widespread price pressures — a key indicator for policymakers concerned about energy-driven inflation spreading through the economy.

Shelter inflation continued to cool, rising 1.7% year over year compared with 1.8% in April. Travel tour prices remained volatile, increasing 0.7% in May after a 11% decline the previous month.

Food inflation, however, accelerated to 3.8% from 3.5%, driven partly by higher prices for fresh fruit and vegetables. Costs for computer equipment, software, and supplies rose 3.9%, marking the first annual increase since 2020, driven by higher prices for memory and solid-state drives.

Regionally, inflation stood at 2.6% in Ontario, 3.6% in Quebec, and 3.7% in Alberta.

By Vafa Guliyeva