Canada's Consumer Price Index was up 0.6 percent in May from April, coming in at the high end of expectations in an Econoday survey of forecasters that had centered on a 0.5 percent increase. The 12-month inflation rate remained stable at 1.7 percent, as expected.

Excluding energy, year-over-year inflation slowed to 2.7 percent from 2.9 percent, with energy prices dropping 11.0 percent from a year earlier despite a 0.9 percent monthly gain.
Excluding food and energy, core inflation was up 0.6 percent on the month and 2.6 percent year-over-year, above the 2 percent Bank of Canada's target. Food prices were up 0.5 percent on the month and 3.4 percent year-over-year.

Two of the Bank of Canada's own measures of core inflation showed some easing pressure as they came down to 3.0 percent from 3.1 percent, although this is still the top end of the central bank's 1-to-3 percent operating range. The average remained steady at 2.9 percent.

Core inflation, while stable, still remains quite a bit higher than the central bank's target for comfort and likely in the firmness zone.

Goods prices were up 0.5 percent on the month while edging down 0.1 percent on the year. Services rose 0.7 percent and 3.2 percent, respectively.

In its minutes of the June 4 meeting, the Bank of Canada pointed out the considerable amount of time spent on discussing inflation in light of opposing pressures from weaker demand and higher tariff-related costs. Governing Council members assessed that the direct impact from retaliatory tariffs on goods prices was not yet evident. But Governor Tiff Macklem said in a June 18 speech that overall we may be seeing some indirect effects related to trade disruption. On the downside, the elimination of the consumer carbon tax will also continue to have a downward effect on year-over-year comparisons for months to come.

In May, the eight main categories saw higher monthly prices, except shelter, which was flat, for a 12-month increase of 3.0 percent. Given the concern of some of the central bank members over the breath of CPI categories with price increases above 3.0 percent, the slowdown in shelter from 3.4 percent the previous month will come as a relief. The weight of shelter in the basket inched up to 29.41 percent from 29.15 percent in the 2023 basket. Still, mortgage interest cost and rent remained the top two contributors to the 12-month CPI increase. That being said, both saw a slowdown in May, to 4.5 percent from 5.2 percent for rents and to 6.2 percent from 6.8 percent for mortgage interest cost, which decelerated for the 21st consecutive month. Gasoline prices, down 15.5 percent, were the main downward contributor to the 12-month CPI, followed by air transportation.

On a 12-month basis, transportation was the only one of the eight main categories to record lower prices, with a 1.3 percent decline. The highest increase was food (3.4 percent).

On a monthly basis, traveller accommodation was main upward contributor (21.6 percent), followed by telephone services and gasoline prices, which increased 1.9 percent, driving up transportation.

The seasonally adjusted CPI rebounded 0.2 percent on the month after declining 0.2 percent in April. The core index, however, rose at a steady pace of 0.3 percent.

Overall, the report provided some relief, with core prices stabilizating, but likely not enough reassurance to move ahead with a 25-basis point rate cut that had been discussed at the June 4 BoC meeting. The latter will also depend on the extent to which activity weakens in the second quarter.

Forecasters see CPI up 0.5 percent on the month and 1.7 percent on year in May versus minus 0.1 percent and 1.7 percent in April.

The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. The policy target measure for the Bank of Canada (BoC), the annual CPI rate can be distorted by swings in the more volatile subsectors so the central bank also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.

The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Canada, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.

Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.

Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.

By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.

As the most important indicator of inflation the CPI is closely followed by the Bank of Canada. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. It uses the CPI and three measures of the underlying rate as the prime inflation indicators. Markets also look at core rate which excludes food and energy.