A Tuesday report showing a slowdown in inflation should be a relief for the Bank of Canada as it wrestles with high consumer prices, economists said, while warning that other hot economic data remains a concern for monetary policymakers.

Statistics Canada’s consumer price index report for May, released Tuesday, saw year-over-year inflation fall to 3.4 per cent – its lowest level since June 2021 and closer to the Bank of Canada’s target rate of two per cent, after coming in at 4.4 per cent in April.

“I’m sure the Bank of Canada has exhaled a little bit,” Sal Guatieri, director and senior economist at BMO financial group, said of the inflation figures.

“You're basically double the inflation target, so we're not all the way there yet, but things seem to be moving in the right direction.”

Despite some positive signs, Guatieri cautioned that there is a difficult path ahead when it comes getting inflation down to two per cent – something he doesn’t anticipate happening until late 2024, particularly as the broader economy has remained hot in the face of rate tightening efforts to date, with strength in the labour market and consumer spending.

“It will be a slower road going forward,” he said in a television interview. “The real concern for the Bank of Canada now is that the economy has slowed a bit, but not anywhere close to where it needs to be to ultimately ease inflation pressures.”

Pedro Antunes, chief economist at the Conference Board of Canada, told BNN Bloomberg the figure is “very good news” for the central bank, as economic data for 2023 so far has appeared generally resilient to the effects of interest rate hikes.

“Central bankers have been nervous about not so much the inflation numbers, but more so around the strength of the economy that we saw in the first quarter,” Antunes said in a television interview.

He said the rate increases of the past year do not appear to have dampened consumer behaviour enough, pointing to strong retail sales and a recent rebound in home prices, while inflation was brought down last month due to “external” factors like lower fuel prices.

“I think they’ll be very pleased on the inflation numbers but they’ll be concerned around the strength of that domestic economy,” Antunes added.


The inflation print may be welcome news as the Bank of Canada prepares for its July monetary policy decision, after unexpectedly hiking its central interest rate in June to 4.75 per cent.

Antunes said he thought the central bank could have held rates in June, and he expects elevated interest rates will continue to “erode” economic activity, though population growth and strong incomes will “continue to drive spending.”

He also anticipates that there will be a slowdown in the third and fourth quarters of the year as consumers deplete their savings.

Tuan Nguyen, economist with accounting and consultancy at RSM Canada, said the inflation print has lowered the probability of a July rate hike, but next month’s meeting will be a “live event” as policymakers debate the latest data.

“Together with the surprised decline in net employment released earlier this month, we are in favour of a pause in July should there be another fall—or weak growth—in job gains, which is due in two weeks,” he said in a written statement.

Even if the Bank of Canada pauses in July, Nguyen said Canadians should brace for the possibility of more rate hikes as the year continues, adding that it’s unlikely the central bank will lower rates in 2023.