Canada’s annual inflation rate unexpectedly ticked higher in May rising to 2.9 per cent compared with 2.7 per cent in April.

Statistics Canada reports that the overall increase for May came as prices for services rose 4.6 per cent from a year ago, up from a 4.2 per cent increase in April. Prices for goods grew at the same rate as April at one per cent. Mortgage interest costs were up 23.3 per cent compared with a year ago, while rent prices were up 8.9 per cent.

Prices in May for travel tours rose 6.9 per cent compared with a year ago while air transportation prices increased 4.5 per cent Gasolene prices were up 5.6 per cent compared with a year ago. Grocery prices rose 1.5 per cent year-over-year in May, a tick higher compared with April, when they rose 1.4 per cent. 

This is the first acceleration in grocery prices since June last year with Statistics Canada noting that consumers are paying 22.5 per cent more for groceries compared with May 2020. This latest inflation out-turn raises doubts about what the Bank of Canada will do when it makes its next interest rate decision next month.

The move higher follows a decision by the Bank of Canada, which targets an annual inflation rate of two per cent to cut its benchmark interest rate by a quarter of a percentage point earlier this month to 4.75 per cent. TD Bank senior economist, James Orlando said called the inflation report a disappointment as both core and overall inflation rose higher.

Following the inflation report, financial markets suggested the odds that the central bank would cut rates in July were remote. The Bank of Canada’s next rate decision is set for July 24 when it will also publish its latest outlook for the economy in its monetary policy report. 

In addition to the June inflation figures, Statistics Canada will release its gross domestic product figures for April and its labour force survey for June. The Bank of Canada will also release its own business outlook survey and Canadian survey of consumer expectations on July 15.

A summary of the deliberations by the Bank of Canada’s governing council regarding its June rate decision suggested the central bank considered waiting until July to lower interest rates but ultimately decided to cut earlier.