Canada's inflation rate slows to 3.4%, lowest level in almost 2 years

Canada's inflation rate decelerated to 3.4 per cent in the year up to May, Statistics Canada said Tuesday, led by sharply lower gasoline prices.

That's a significant slowdown from the 4.4 per cent pace seen in April.

Gasoline prices were the single biggest reason for the deceleration. If gasoline is stripped out, the inflation rate would be 4.4 per cent.

Gasoline prices being down, on average, by more than 18 per cent compared to the record highs they were hitting this time last year was enough to drag down the overall inflation rate just by itself.

But beneath the headline slowdown in consumer prices, many facets of the cost of living are still increasing at an eye-watering pace.

Grocery prices went up at an almost nineper cent pace. That's barely lower than the 9.1 per cent pace clocked in April, and still almost three times the inflation rate.

Food prices have been increasing at a faster pace than the official inflation rate since late 2021.

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Food truck owners say inflation is eating their profits

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Entrepreneurs Raj Kuganesan and Brenda Phillips, who own food trucks in Oshawa, Ont. say the price of everything from gasoline to ingredients has forced them to raise their prices over the past year.

But putting food on the table isn't the only household expense that's getting harder to do. The cost of keeping a roof over one's head continues to rocket higher, too.

The mortgage interest cost index rose29.9 per cent in the year up to May. That's the fastest pace on record, and it's happening because the Bank of Canada has been aggressively hiking its lending rate in an attempt to cool demand.

That's been a direct hit on anyone with a variable rate mortgage, where the cost of servicing the loan has been skyrocketing all year. Even fixed-rate loans are having to renew and lock in at much higher rates than they were paying before.

More expensive mortgage costs are the single biggest factor influencing the inflation rate, the data agency said. If mortgage costs are stripped out of the numbers, Canada's headline inflation rate would have been 2.5 per cent. That's down from 3.7 per cent in April.

Another rate hike possible

Trading in investments known as swaps imply investors think there's about a 50/50 chance that Canada's central bank will raise its benchmark lending rate from 4.75 to fiveper centwhen it meets next month and if they don't it's a virtual lock that it will happen in September.

Leslie Preston, an economist with TD Bank, noted that if you strip out volatile items like gasoline and mortgages, underlying inflation at around 3-4 per cent is still probably warm enough that the Bank of Canada is likely to think at least one more rate hike is warranted at some point.

WATCH | Inflation falls to lowest level in 2 years:

Inflation falls to 2-year low, but costs remain high

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Canadian consumers are hoping for some relief as inflation drops to 3.4 per cent, the lowest it's been since 2021, but food and mortgage costs continue to soar, which could mean another interest rate hike is possible.

"Cooler goods inflation is welcome, but the Bank of Canadahas likely been counting on that already as supply chain snarls improve," she said. "Canadian inflation continued to cool in May, but progress is unlikely to be enough to prevent the Bank of Canada from raising rates in July."

Food prices, which have been a subject of much consternation for many Canadians this year, should start coming down soon, she notes.

"We have seen inflation further up the supply chain that feeds into food prices come down dramatically in recent months,' she said in an interview with CBC News ."They don't change prices overnight... Typically it's abouta year before we really start to see those sorts of commodity and energy prices reflected in retail food prices. So we do expect food inflation to cool but it is going to take some time."