Canada's annual inflation rate rose to 3.2% in May, the highest in 29 months, according to data released Monday by Statistics Canada. This marks the first time in nearly two and a half years that the overall inflation rate has moved outside the Bank of Canada's target range of 1% to 3%.
Gasoline prices were the main driver behind the increase, surging 33.2% year-over-year, the largest jump since the Russian invasion of Ukraine. Month-over-month inflation rose 1% in May, the highest gain in 15 months.
The rise in gasoline prices spilled over into transportation costs, which increased 9% from the previous month. Overall consumer prices climbed 2.2% due to higher costs for food, entertainment, and alcoholic beverages. Food prices rose 3.8% in May, led by a 5.3% increase in fresh fruit and a 9% jump in vegetables.
Doug Porter, chief economist at BMO Capital Markets, told Reuters: 'It's never good news to see the headline inflation rate above 3%, even if just for one month.'
However, the inflation figure is unlikely to change the Bank of Canada's assessment of core inflation, as the central bank previously stated it sees limited evidence that high energy prices are fueling broad-based inflation.
Housing costs rose 1.7% in May, a slight decrease from the 1.8% increase in April, mainly due to a 0.2% decline in mortgage costs.
The rise in inflation comes amid escalating living costs that have become a political challenge for Prime Minister Mark Carney, who pledged to address affordability after his party won a majority of seats in Parliament in April.
Gasoline prices are expected to fall sharply in June following the signing of a temporary peace agreement between the U.S. and Iran last week that ended the U.S.-Israel war with Iran. Michael Davenport, senior economist at Oxford Economics Canada, said: 'The U.S.-Iran deal to reopen the Strait of Hormuz has pushed oil prices down sharply in June, so May is likely to be the near-term peak for headline inflation.'
Davenport also cautioned: 'There remains considerable uncertainty about the durability of the ceasefire, and the risk of oil prices rising again remains high.'
