Canada’s inflation rate falls to 3.4%, lowest rate since June 2021

Canada’s inflation rate fell to 3.4 per cent in May — the lowest it’s been since June 2021.

The decline is likely welcome news for the Bank of Canada, which is gearing up for its next interest rate decision on July 12 after raising a quarter-percentage point to 4.75 per cent earlier this month.

Statistics Canada reported Tuesday the slowdown was largely due to lower gasoline prices compared to a year ago.

However, the long-awaited decline in food inflation has yet to come through in Canada. Grocery prices were up nine per cent on an annual basis, showing little improvement from April.

Meanwhile, the slowdown in the headline rate comes after inflation ticked up in April to 4.4 per cent, marking a slight reversal of the progress made since last summer.

The Bank of Canada justified its most recent rate hike in part by pointing to the slight rise in inflation in April. It’s expected to make its next interest rate decision based on incoming economic data, including Tuesday’s inflation report.

The central bank will be paying particular attention to its core measures of inflation, which strip out volatility. Those measures also declined last month.

Forecasters and the central bank were expecting inflation to fall considerably this year to about three per cent this summer. That’s because of what economists call base-year effects, whereby price movements a year ago affect the calculation of the inflation rate.

Given the rapid run-up in prices that occurred in the first half of 2022 after the Russian invasion of Ukraine, the pace of inflation is slower today because prices are being compared to those elevated levels.