Canada CPI Preview: Inflation expected to continue easing in May
- The Canadian Consumer Price Index is set to rise 2.6% YoY in May after April’s 2.7% increase.
- Canada’s CPI inflation data will likely impact the timing of the next Bank of Canada interest rate cut.
- Statistics Canada will publish the CPI inflation data at 12:30 GMT on Tuesday.
Statistics Canada is set to release the top-tier Consumer Price Index (CPI) data for May on Tuesday at 12:30 GMT.
The timing of the Bank of Canada’s (BoC) next interest rate cut will depend on the CPI inflation data, significantly impacting the market’s pricing and the value of the Canadian Dollar.
What to expect from Canada’s inflation rate?
The Canadian CPI is expected to rise at an annual rate of 2.6% in May, a tad slower than a 2.7% increase in April. On a monthly basis, the CPI inflation is seen easing to 0.3% in the same period after April’s 0.5% growth. The core CPI showed no growth over the month in April.
Alongside the CPI data release, the Bank of Canada will publish its closely watched core Consumer Price Index data, which excludes volatile items such as food and energy prices. In May, the annual BoC core CPI inflation is seen steady at 1.6%, while the monthly BoC core CPI is set to rise by 0.2%.
Canada’s inflation is likely to stay below 3.0% for the fifth month in a row, although closing in on the central bank's 2.0% target.
Previewing the Canadian inflation report, analysts at TD Securities (TDS) noted: “We look for headline CPI to rise by 0.3% in May on another large increase for shelter as inflation edges lower to 2.6% YoY.”
“Core inflation measures should hold stable at 2.9%/2.6% for CPI-trim/median, translating to a modest acceleration on a 3M (SAAR) basis, but we do not expect the BoC will be overly concerned by this and see a high bar for this print to derail a July cut,” the TDS analysts said.
Markets are widely pricing in another BoC rate cut at the July 24 policy meeting. However, one additional inflation report is due before the next policy announcement.
TDS Director of Economics, James Orlando, said that “it would probably take a bad reading, either this month or next, to stop the Bank of Canada from cutting."
The central bank's Summary of Deliberations revealed last week that Governor Tiff Macklem and his colleagues thought about waiting until July to lower interest rates but ultimately decided to cut earlier at the June 5 meeting.
Following the policy announcement, Macklem said that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2.0% target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”
The BoC joined Sweden's Riksbank and the Swiss National Bank (SNB) in reducing rates, followed by the European Central Bank (ECB), making Canada the first nation amongst the G7 countries to adopt the dovish policy pivot. The central bank lowered key policy rate to 4.75% from 5.0% in June, the first cut in four years.
How could the Canada CPI data affect USD/CAD?
The Canadian Dollar (CAD) has paused its recovery from two-month lows of 1.3792 against the US Dollar (USD) in the lead-up to Tuesday’s CPI showdown. Strong S&P Global preliminary PMI data for June from the United States and risk-aversion continue to underpin the US Dollar at the start of the new week, lending support to the USD/CAD pair.
The Canadian Dollar could regain its recovery momentum if the headline and core CPI figures surprise to the upside and squash expectations of back-to-back interest-rate cuts by the BoC. In such a case, USD/CAD could resume its corrective downside toward the 1.3600 level. Conversely, soft CPI data could boost the BoC’s confidence that inflation is sustainably reaching toward its target, reverberating the market expectations for another rate cut next month. In this scenario, USD/CAD could stage a rebound toward 1.3800, as renewed dovish bets could weigh heavily on the CAD.
Dhwani Mehta, FXStreet’s Senior Analyst, offers key technical levels for trading USD/CAD on Canada’s inflation report: “USD/CAD battles the key confluence zone near 1.3690, where horizontal 21-day Simple Moving Average (SMA) and the 50-day SMA coincide. The 14-day Relative Strength Index (RSI) sits just beneath the 50 level, reflecting buyers’ caution.”
“Acceptance above the 21-day SMA and 50-day SMA confluence at 1.3690 could drive USD/CAD back toward the previous week’s high of 1.3765. Further up, the 1.3800 round level will be on buyers’ radars, close to two-month highs of 1.3792. On the downside, a daily closing below the static support near 1.3665 will reopen the door for a test of the 100-day SMA at 1.3619. The next relevant cushion is seen at the 200-day SMA at 1.3586,” Dhwani adds.
Economic Indicator
Consumer Price Index (YoY)
The Consumer Price Index (CPI), released by Statistics Canada on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. The YoY reading compares prices in the reference month to the same month a year earlier. Generally, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.
Read more.Next release: Tue Jun 25, 2024 12:30
Frequency: Monthly
Consensus: 2.6%
Previous: 2.7%
Source: Statistics Canada
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.
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