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May inflation rate at 7.7% in Canada, the highest since 1983; USD/CAD bears gains -by Ecork

Canadian inflation data:

  • The May CPI rose 1.4% month over month, five-tenths of a percentage point higher than estimates. The annual rate, for its part, is rising to 7.7%, the highest level in nearly 40 years.
  • Core inflation increased 0.8% m/m and 6.1% y/y as well topping expectations
  • USD/CAD maintains daily gains after Canadian CPI report crosses wires, but move correlates with risk-off sentiment and lower oil prices

Most Read: Central Bank Watch – Bank of Canada, Reserve Bank of Australia and Reserve Bank of New Zealand Interest Rate Outlook

Price pressures strengthened last month in Canada, buoyed by soaring energy and food costs, further eroding consumers’ purchasing power and raising risks Inflation has become dangerously entrenched in the economyAnd the A situation that could lead to more aggressive monetary tightening in the coming months.

According to Statistics Canada, Consumer Price IndexAnd the which measures a comprehensive basket of goods and servicesby 1.4% month-on-month in May, bringing the annual reading to 7.7%, the highest level since January 1983, A number nearly four times the central bank’s 2% target. Analysts polled by Bloomberg News had expected the headline CPI to rise by just 1.0%. Mom and 7.4% year.

The details of the report showed that energy was the most contributor in the month increase, as this category increased by 8.5% on the back of 12% mom rushes strength in gasoline. With prices at the pump a greater rise during the first half of June, energy expenditure You will remain aligned to the top In the near term, suggesting that The benchmark could exceed 8% later in the year before taking first place.

Core CPI, which excludes energy and food and tends to reduce temporary noise from volatile items, increased 0.8% month over month and 6.1% year over year. The annual rate was the highest print since the series was introduced in 1999, a sign that price pressures are rife and affect even the steadier components of the CPI basket.

face with Expansion of inflationary forcesThe Bank of Canada may be tempted to continue raising interest rates in upcoming meetings in order to restore price stability, Especially since the resilience of economic activity gives policy makers room to be aggressiveat least for now. Against this backdrop, the Bank of Canada (BoC) is likely to raise borrowing costs by 75 basis points to 2.25% at its July meeting, marking its biggest rise in 24 years.

Bank of Canada Governor Teff McClem said a few weeks ago that a benchmark interest rate of 3% or higher is not out of the question. Today’s CPI report is likely to reinforce expectations that Institute It will have no choice but to move monetary policy to restrictive area In its efforts to Curb hyperthermic hypertrophy;

Tightening cycle by the Bank of Canadasimilar to Federal Reservewill prevent yield differentials between US and Canadian debt from widening, providing support for the Canadian dollar as long as sentiment improves and global markets stabilize.

The USD/CAD pair maintained its morning gains and traded around 1.2980 immediately after the Canadian CPI report crossed, with the advance attributed to risk aversion and lower oil prices. Once risk appetite recovers, the Canadian dollar may be able to moderately rise against the dollar.

USD/CAD 3 minute chart

source: TradingView

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— By Diego Coleman, Market Strategist, DailyFX

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