TD Securities strategists anticipate that Canada's May Consumer Price Index (CPI) will increase, projecting headline inflation at 3.1% year-on-year and 0.8% month-on-month, primarily driven by higher energy prices and seasonal factors [1]. Core goods and travel-related components are expected to provide additional support, while CPI-trim and CPI-median are forecast to remain steady at 2.0% and 2.1%, respectively, keeping core inflation broadly aligned with Bank of Canada (BoC) projections [1]. This would follow a 0.4 percentage point slowdown in core inflation over the past three months [1].
Statistics Canada is expected to report inflationary pressures growing at a faster pace of 3% year-on-year compared to 2.8% in April, and a monthly increase of 0.7%, up from 0.4% previously [2]. However, TD Securities' forecast is slightly higher than the market consensus, which stands at 3.0% year-on-year and 0.7% month-on-month [1][2].
Ahead of the CPI release, the Canadian Dollar (CAD) has underperformed against its major currency peers, notably trading 0.16% lower against the US Dollar (USD), with USD/CAD reaching 1.4180, its highest level in over a year [2]. The CAD was the weakest against the British Pound among major currencies [2].
Despite signs of accelerating price pressures, Bank of Canada Governor Tiff Macklem stated last week that the central bank believes its current rate is appropriate, noting that core inflation has ticked down and the economy is facing a challenging phase [2]. This suggests that a firmer inflation print is unlikely to prompt more hawkish BoC policy bets [2]. Meanwhile, the US Dollar is strengthening amid expectations of at least two Federal Reserve rate hikes this year, with the CME FedWatch tool showing a 58.5% probability, up from 17.1% a week ago [2].
Investors are also watching for the US Personal Consumption Expenditure Price Index (PCE) data for May, set to be released on Thursday [2].
CONCLUSION
Canada's inflation is expected to accelerate in May, driven by energy prices, but the Canadian Dollar has weakened ahead of the data release. Despite firmer inflation, the Bank of Canada is unlikely to shift to a more hawkish stance, as core inflation remains in line with projections and economic challenges persist. Market attention remains focused on upcoming US inflation data and Federal Reserve policy expectations.