June 25, 2025
Inflation growth held steady in May at 1.7 per cent year over year, but economists are split on whether it provides enough evidence for the Bank of Canada to cut rates at its next policy meeting in July.
Core CPI-median and CPI-trim inflation grew three per cent in May, down from 3.2 per cent and 3.1 per cent in April, respectively, matching analyst estimates while remaining well above the Bank of Canada’s inflation target of two per cent.
Bank of Canada policymakers have made it clear that their attention is focused on inflation and the possibility that tariffs could cause another spike.
One more inflation report is due before the policymakers’ next interest rate announcement on July 30.
The Bank of Canada’s target range for inflation is one per cent to three per cent.
Here’s what economists think the latest inflation numbers mean for the Bank of Canada and interest rates.
Canadian dollar helps: CIBC Economics
An ongoing pullback in rent and mortgage costs will help counter the effects of tariffs on the price of goods, Katherine Judge, an economist at CIBC Capital Markets, said.
The cost of food boosted the Bank of Canada’s favoured core inflation measures, but the price of groceries “sharply” fell last month.
“The appreciation in the Canadian dollar over the last few months is helping to contain food prices amidst tariffs,” she said in a note.
Canada has a lot of exemptions on its counter tariffs on the U.S., so the effects of U.S. levies are mostly on finished goods, such as vehicles and some food.
“Tariff impacts will become more evident in the releases ahead, but we look for waning demand tied to the rise in the unemployment rate to provide an offset, along with the appreciation in the Canadian dollar, and a deceleration in shelter inflation,” Judge said.
For now, CIBC said that core inflation measures need to keep trending in the right direction for the Bank of Canada to “deliver the July cut that we expect.”
‘Space’ to cut: TD Economics
In May, “there was good news all around” as the four core inflation measures decelerated, Andrew Hencic, director and senior economist at TD Economics, said.
He said the jobs market has stalled and that should “keep a lid on inflation,” but a lot depends on how negotiations over tariffs play out.
“But we believe that the soft economic backdrop should give the (Bank of Canada) space to deliver two more cuts this year,” he said in a note.
‘Remain on hold’: Capital Economics
The effects of tariffs were scattered throughout the May consumer price index report (CPI), Alexandra Brown, North America economist at Capital Economics Ltd.
Prices for new vehicles rose, potentially a result of tariffs on automobiles. Prices also rose on furniture, equipment, clothing and footwear — other indications of tariff mischief, she said.
She said the Bank of Canada’s favoured measures on inflation remain “too high” at three per cent annualized.
“Given the evidence of tariffs putting upward pressure on goods prices, our base case now is that the Bank (of Canada) will remain on hold again in July before considering rate cuts again later in the year,” Brown said in a note.
‘More noise than signal’: Desjardins
“Core measures of inflation suggest Canada doesn’t have much of an inflation problem,” Royce Mendes, managing director and head of macro strategy at Desjardins Capital Markets, said in a note.
The end of the consumer carbon tax will continue to contain the headline inflation reading for the next while.
Accelerating inflation that was recorded — in vehicles and goods — was “in part seemingly due to tariffs.”
Mendes also pointed to the slowdown in shelter prices, highlighting the ongoing deceleration in the cost of rent and mortgages as tariff inflation busters.
Year-over-year prices for 40 per cent of items in the CPI basket rose by three per cent, which are still “elevated,” but down from 42 per cent in April, he said. “But we think that is more noise than signal.”
He said the May inflation report was “relatively tame,” adding that “we continue to forecast that the Bank of Canada will cut rates in July” as evidence grows that tariffs aren’t leading to more “broad-based” price pressures.
