Canada's Inflation Rate Hits 29-Month High in May Driven by Oil Prices

Canada’s annual inflation rate surged to a 29-month high in May at 3.2 percent as heightened oil prices due to the US-led tensions with Iran weighed on petrol prices.

The release of the data by Statistics Canada on Monday marked the first time in nearly two-and-a-half years that Canada’s headline inflation has moved outside the Bank of Canada’s one percent to three percent target range.

“It’s never good news to see the overall inflation rate track above three percent, even if it is for one month only,” said Doug Porter, chief economist at BMO Capital Markets, to the Reuters news agency.

The monthly inflation rate jumped one percent in May, marking the highest gain in 15 months.

Petrol prices jumped 33.2 percent on an annual basis in May. This is the highest since Russia invaded Ukraine, according to Statistics Canada.

The increase overall rippled into transportation costs, which increased 9 percent compared to the previous month.

Overall consumer prices jumped 2.2 percent amid heightened food, recreation, and alcoholic beverage costs on an annual basis. Food prices jumped 3.8 percent in May, led by a 5.3 percent increase in the cost of fresh fruit and a 9 percent increase in the price of vegetables.

The inflation number is not likely to alter the Bank of Canada’s assessment of underlying inflation, as it said earlier this month that it was seeing limited evidence that higher energy prices were fuelling broad-based inflation.

Shelter costs rose by 1.7 percent in May following a 1.8 percent increase in April, data showed, led by a reduction in mortgage costs, which shrank by 0.2 percent last month.

Heightened inflation comes at a time when rising living costs are emerging as a political challenge for Prime Minister Mark Carney, who pledged to tackle affordability after his party won a parliamentary majority in April.

Petrol prices, however, are already showing a major reversal in June after an interim peace deal to end the US-Israel war on Iran was signed between the United States and Iran last week, which, analysts have said, could help ease the headline number in June.

“The US-Iran agreement to reopen the Strait of Hormuz has caused oil prices to fall sharply in June, so May will likely represent the near-term peak for headline inflation,” Michael Davenport, senior Canada economist at Oxford Economics, said in a note provided to Al Jazeera, referring to a vital Middle Eastern waterway through which 20 percent of the global oil supply is shipped.

“There’s still plenty of uncertainty about the durability of the ceasefire, and the risk of a resurgence in oil prices remains elevated.”