Statistics Canada will release May inflation data on Tuesday and if the numbers show price growth continued to cool, as many economists expect, it could ease the path to a second interest rate cut by the Bank of Canada.

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In April, the consumer price index (CPI) rose 2.7 per cent year over year, down from a 2.9 per cent gain in March. The slowdown in inflation was due to a deceleration in prices for grocery items and household goods.

Randall Bartlett, senior director of Canadian economics at Desjardins Group, expects Tuesday’s data will show annual inflation ticked down once again to 2.6 per cent in May, putting it on track for a return to two per cent by year-end.

“Looking at our inflation outlook, we’re expecting inflation to continue on the path that we’ve seen,” he said. “Underlying demand in the Canadian economy is pretty weak, consumers are showing a lot of caution in spending and the savings rate is very high because consumers are anticipating mortgages renewing at higher interest rates.”

CIBC Capital Markets economist Katherine Judge also expects to see a decrease in the CPI, with inflation dropping to 2.5 per cent year over year. Excluding mortgage interest rate costs, that drop is expected to be even bigger.

“If you exclude mortgage interest rate costs from CPI, it’s running much lower, and it has for several months,” she said. “It’s been running around two per cent, which is just a reason for the Bank of Canada to continue cutting.”

The question on everyone’s mind is what the inflation trend will mean for future rate cuts by the Bank of Canada.

On June 5, the Bank of Canada announced its first rate cut in nearly four years, bringing the policy rate down from five per cent to 4.75 per cent.

At a press conference in Ottawa that day, Bank of Canada governor Tiff Macklem warned that bringing inflation down further is likely to be an uneven process and decreasing the policy rate too quickly could jeopardize the progress already made.

Despite Macklem’s words of caution, economists are already predicting multiple cuts in the four remaining policy rate announcements in 2024.

“We are assuming one 25-basis-point cut at each meeting this year,” Stephen Brown, an economist at Capital Economics Ltd., said. “Which will take the policy rate down to 3.75 per cent, from 4.75 per cent currently.”

Bartlett thinks the central bank also has room to cut next month, but may take a pause in September.

“Right now, we have pencilled in another cut in July, we think the Bank of Canada has the room to cut,” he said. “We think there will be a pause potentially in September, allowing the Bank of Canada to re-evaluate and also get a sense of direction from the other central banks, notably the Fed.”

While economists are confident that inflation will continue to cool, there are still risks that could disrupt this trend.

The Bank of Canada spent a considerable amount of time discussing some of the upside risks to inflation before its policy rate cut in June, according to deliberations released last week. Those risks include the potential for an overheated housing market due to lower borrowing rates.

“One upside risk is starting to look like house prices in addition to the pressures on shelter CPI that are coming from soaring rent,” Derek Holt, vice-president and head of capital markets economics at the Bank of Nova Scotia, said in a note. “Demand stimulus is being skewed toward builders by Ottawa’s announcements to provide new build subsidies plus other pending changes, like when 30-year insured mortgages for newly built homes become available in August given changes in the recent federal budget.”

Another upside risk discussed by the central bank was wage pressures, with annual wage growth at four per cent. The combination of wage growth and poor productivity means labour costs continue to increase at an above-average pace, according to the Bank of Canada.

However, Judge said those pressures often lag the latest data.

“One area that the bank has highlighted that they’re looking at is wage growth, which has been hotter than you would expect, given measures of labour market slack,” she said. “That tends to lag economic conditions, so we think that will continue to ease off.”

• Email: jgowling@postmedia.com

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