Canadian Inflation Rose to 3.2% in May as Core Inflation Remained Subdued

Higher gasoline prices pushed Canadian inflation to a more than two-year high, while underlying inflation pressures showed little sign of accelerating, with core measures broadly unchanged and price gains less broad-based.

Canada’s annual inflation rate rose to 3.2% in May, Statistics Canada reported Monday, marking its highest level since December 2023. The increase exceeded economists’ expectations, with Bloomberg’s survey consensus forecasting a 3.0% gain, up from 2.8% in April. On a monthly basis, consumer prices climbed 1.0%, also coming in above forecasts.

Despite the headline surprise, measures of underlying inflation suggest price pressures remain relatively contained as the economy continues to adjust to slower population growth and the adverse effects of U.S. trade policies on exports.

Excluding food and energy, inflation accelerated to 1.6% year-over-year, while the consumer price index excluding gasoline increased 2.2%. The average of the Bank of Canada’s preferred core inflation measures—the trim and median indexes—held steady at 2.1%. However, on a three-month annualized basis, both gauges picked up sharply to 2.3%, indicating some recent firming in underlying inflation trends.

Financial markets initially interpreted the report as supportive of tighter monetary policy. The Canadian dollar strengthened briefly before reversing course, trading at US$0.7062 per Canadian dollar. Meanwhile, the two-year Government of Canada bond yield rose roughly two basis points to 2.79%. Overnight index swaps continue to price in nearly one quarter-point Bank of Canada rate increase by year-end.

The conflict in the Middle East continued to drive higher energy costs in May, with gasoline prices rising 33% from a year earlier, according to Statistics Canada. Air transportation prices also surged, increasing 7.4% after falling 1.7% in April. Airlines are experiencing higher operational costs, notably for jet fuel.

Since then, easing tensions between the United States and Iran has helped push oil prices lower, with Canadian gasoline prices retreating to their lowest levels since mid-March. If sustained, the decline should provide some relief to consumers and help moderate headline inflation in the months ahead. Earlier this month, Bank of Canada Governor Tiff Macklem said he expects inflation to remain near 3% in the near term before gradually returning to the central bank’s 2% target.

Gasoline prices increased 33.2% year-over-year in May, accelerating from a 28.6% gain in April. The escalation was largely driven by supply concerns linked to the conflict in the Middle East, particularly disruptions associated with the closure of the Strait of Hormuz. These uncertainties pushed gasoline prices higher for a third consecutive month. As a result, Canadians paid the highest prices at the pump since June 2022, when Russia’s invasion of Ukraine triggered similar supply fears and a sharp increase in global energy costs.

Four of the eight major components accelerate in May

Prices for fresh fruit rose at a faster pace year over year in May (+5.3%) compared with April (-0.5%). Berries and grapes mostly drove the acceleration. On a year-over-year basis, prices for fresh vegetables increased 9.0% in May, following a 4.1% rise in April. The upward movement was attributed to higher prices for broccoli, cauliflower, tomatoes and lettuce. Tomato prices rose 45.2% in May due to supply contractions in Mexico, stemming from poor weather and a reduction in planted acreage following the implementation of US tariffs.

On a month-over-month basis, prices for fresh vegetables rose 5.5% in May following a decline of 3.9% in April. This is the largest monthly increase in May since 2008 and is attributed to reduced supply and higher fuel costs.

Collectively, higher prices for fresh fruit and fresh vegetables contributed to an acceleration in inflation for food purchased from stores, rising 4.3% year over year in May, the 16th consecutive month it has outpaced headline inflation on a year-over-year basis. Food prices will continue to rise, reflecting a 40% increase in nitrogen fertilizer prices during the planting season.

Shelter inflation continued to moderate in May, with prices rising 1.7% year-over-year, down slightly from 1.8% in April. The homeowners’ replacement cost index fell 2.5%, marking its 13th consecutive decline. Other owned accommodation expenses, including real estate commissions, decreased 2.1% following a 2.7% drop in April. Meanwhile, mortgage interest costs edged lower, declining 0.2% year-over-year compared with a 0.1% decline in April, extending a 33-month trend of slowing mortgage cost inflation.

Rent inflation also eased modestly, rising 3.5% from a year earlier versus 3.6% in April, the slowest pace of rent growth since January 2022.

Price growth for durable goods was unchanged at 1.9% year-over-year in both April and May. A notable source of upward pressure came from computer equipment, software, and supplies, where prices rose 3.9% after declining 0.2% in April. Higher costs for key components such as random-access memory (RAM) and solid-state drives (SSDs), driven by strong demand from artificial intelligence data centres and limited production capacity, contributed to the increase.

Offsetting some of these gains, price growth slowed across several other durable goods categories. Increases were more modest for tools and household equipment (+1.1%) and passenger vehicles (+2.5%), while prices for household appliances fell 5.7% year-over-year, a steeper decline than previously recorded.

Bottom Line

Today’s inflation report reinforces our view that higher gasoline prices will temporarily boost headline inflation while further eroding household purchasing power. However, these energy-driven increases, largely tied to geopolitical tensions, are unlikely to trigger a broader surge in underlying inflation. While food and transportation continue to account for a disproportionate share of price growth, inflationary pressures across the economy are generally moderating amid a softer labour market and slowing domestic demand.

May data support our base-case scenario that the Bank of Canada will remain on hold through the remainder of 2026. Policymakers will continue to closely monitor incoming inflation data and stand ready to tighten policy if price pressures broaden and become more persistent, but for now, underlying inflation trends remain consistent with a patient, wait-and-see approach.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Housing Market Regains Momentum, Providing a Strong Handoff into Summer

Canada’s housing market gained meaningful momentum in May, with sales posting their strongest monthly increase of the year and leading indicators pointing to further improvement in June. After months of uncertainty, the market appears to be transitioning from stabilization to recovery as lower borrowing costs, easing energy prices, and improved affordability begin to draw buyers back into the market.

As CREA Senior Economist Shaun Cathcart noted, while May marked the first significant increase in headline sales activity in 2026, underlying market conditions have been improving for several months. Buyers and sellers are increasingly finding common ground on pricing, reflected in firmer sale-to-list price ratios, shorter selling times, and a marked slowdown in price declines. These developments suggest that the period of market adjustment is largely behind us and that home prices are beginning to find a floor.

The next phase of the housing cycle may now be taking shape. Pent-up demand, accumulated over the past two years, is starting to intersect with improved affordability and lower home prices, particularly in Ontario and British Columbia, where price corrections have been most pronounced. As confidence gradually returns, this combination could generate a sustained increase in sales activity through the second half of the year.

The single-family home market, where end-user demand remains strong, is leading the market. The condominium sector, particularly smaller investor-oriented units in major urban centres, continues to face headwinds from higher carrying costs, softer rental markets, and diminished investor participation. Even so, as financing conditions improve and excess inventory is absorbed, activity in the condo market should gradually strengthen.

Taken together, stabilizing prices, balanced market conditions, and rising sales suggest that Canada’s housing market is entering a healthier and more sustainable phase. While regional and segment-specific challenges remain, the broader national trend shows the market regaining its footing and building momentum through the summer.

New Listings

New listings declined by 1.0% in May and were down 7.9% from a year earlier, helping keep the national housing market in balance despite still-modest sales activity. Overall, Canada’s housing market can best be described as stable, although conditions vary considerably by region and property type.

Notable pockets of weakness remain in the Greater Toronto Area, Southwestern Ontario, and parts of British Columbia, particularly in the condominium segment. Smaller investor-oriented condos continue to face the greatest challenges. Much of the exceptional demand for these properties during the pandemic years was driven by investors, but that source of demand has weakened considerably. Higher carrying costs, softer rental markets, and slower population growth following significant reductions in immigration targets have all reduced the attractiveness of investment properties.

At the end of May, there were just over 200,000 properties listed for sale across Canadian MLS® Systems on a non-seasonally adjusted basis. That was essentially unchanged from a year earlier and 2.8% below the long-term average for this time of year, suggesting that supply remains relatively well contained at the national level.

The months-of-inventory measure fell to 4.8 months in May from 5.1 months in each of the previous three months. This is very close to the long-term average of five months and is consistent with a balanced national market. Historically, inventory levels below 3.6 months have signalled seller’s market conditions, while readings above 6.4 months have been associated with buyer’s markets.

Taken together, declining new listings, stable inventory, and moderating price declines suggest that Canada’s housing market is gradually finding equilibrium. While certain regions and market segments continue to face adjustment pressures, national conditions have become considerably more balanced than they were earlier in the cycle.

Home Prices

The Canadian housing market continues to show signs of stabilization. In May, the National Composite MLS® Home Price Index (HPI) edged down just 0.1% from April, marking the smallest monthly decline since October 2025. This modest movement is consistent with improving market fundamentals, including firmer sale-to-list price ratios and shorter average days on the market. Stabilizing prices represent an important turning point and could help restore buyer confidence after an extended period of uncertainty.

On a year-over-year basis, the non-seasonally adjusted National Composite MLS® HPI was down 4.2% from May 2025. While still negative, this was the smallest annual decline recorded so far in 2026, suggesting that downward price pressures are gradually easing.

Supply conditions also remain balanced. At the end of May, just over 200,000 properties were listed for sale across Canadian MLS® Systems, virtually unchanged from a year earlier and 2.8% below the long-term average for this time of year.

Taken together, moderating price declines, stable listings, and inventory levels near historical norms suggest that housing market conditions are becoming less challenging for both buyers and sellers. As confidence improves and borrowing costs continue to ease, sales activity could strengthen further in the second half of the year.

Bottom Line

Potential homebuyers faced a challenging backdrop in May as oil prices and interest rates moved higher. Conditions appear more favourable heading into June. News that the Strait of Hormuz is expected to reopen, combined with falling oil prices and easing bond yields, should provide support for housing activity. If a broader agreement between the United States and Iran is reached in the coming weeks, oil prices could decline further, reducing inflation concerns and removing an important headwind for home sales.

The Bank of Canada’s next policy decision is scheduled for July 15. Before then, policymakers will receive several key economic reports, including the May Consumer Price Index (CPI) data and the May Labour Force Survey. Assuming geopolitical tensions continue to ease and energy markets stabilize, the Bank is likely to continue looking through temporary price pressures rather than responding to short-term fluctuations in inflation.

Inflation remains the key risk. Recent U.S. inflation data came in stronger than expected, raising concerns that price pressures could prove more persistent than anticipated. If upcoming Canadian CPI data were to show a similar acceleration, the Bank of Canada would have to consider whether current policy settings remain sufficiently restrictive. While weakness in the labour market and soft housing activity argue against additional tightening, it might be considered, but is likely to be dismissed.

Globally, central banks remain divided. Japan, Norway, and Australia have recently raised interest rates, while the Federal Reserve, the European Central Bank, the Bank of England, and the Bank of Canada all cut rates during 2025 and have remained on hold so far this year.

The minutes from the Bank of Canada’s April 29 meeting underscore the Governing Council’s concern about inflation. Policymakers seriously debated the possibility of a rate hike before ultimately deciding to leave rates unchanged. The close nature of that decision highlights the Bank’s continued vigilance and suggests that inflation developments will remain one primary driver of monetary policy in the months ahead. The other driver is economic weakness, which will likely keep the central bank on hold for the remainder of this year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Bank of Canada Holds Policy Rate Steady

Today, the Bank of Canada once again held the policy rate at 2.25%. This is the bottom of the Bank’s estimate of the neutral overnight rate, where monetary policy is neither expansionary nor contractionary. With inflation hovering at 2.8% and core inflation falling to 2.0% (as of April data), the Governing Council sees the current overnight rate as appropriate, as the Bank continues to look through the inflationary impact of the war in Iran. The war is in its fourth month, and oil prices and interest rates have risen considerably as a result. The war is disrupting supply chains, weakening economic activity and pushing up inflation. At the same time, the US administration continues to propose new tariffs, and the future of CUSMA remains uncertain.

CUSMA negotiations are underway, but they are unlikely to go on beyond the July 1 mandatory date for the formal review of the pact required by the treaty. On that date, the U.S., Canada, and Mexico are each supposed to declare whether they want to renew the deal for another 16 years (out to 2036), renegotiate it, or decline to renew. The three countries are set to miss the July 1 renewal milestone, with negotiations expected to stretch on for months or potentially years. Missing the date does not kill the deal. If the three don’t agree to a full 16-year extension, the agreement stays in force and shifts into a mechanism of rolling annual reviews that can continue for up to a decade. The treaty doesn’t formally expire until July 1, 2036, unless a party withdraws entirely. US Trade Representative Jamieson Greer said that on July 1, “I don’t think we’re going to renew it outright, but we’ll engage in the separate negotiations” — explicitly signalling the date is a starting point, not a hard conclusion. Dominic LeBlanc, the minister responsible for US trade, met with Greer in Washington and afterward suggested that July 1 “shouldn’t be seen as a crucial date.” Mexican and US officials say the scope and complexity of the issues — auto rules of origin, the 50% Section 232 steel/aluminum tariffs, and other disputes — make resolution by July 1 unlikely.

While first-quarter GDP growth in Canada showed a small contraction, economic growth has been solid in the US, boosted by consumption and AI-related investment. In the euro area, growth is subdued, with higher energy prices weighing on activity. China’s economic growth continues to be supported by strong exports, while oil imports have slowed substantially. Oil demand destruction is evident as China has chosen to limit energy use and draw down inventories.

Financial conditions in Canada have eased since the April Monetary Policy Report (MPR). Global equity markets have been buoyant, and bond yields, though volatile, have generally trended higher. The Canadian dollar has weakened against the US dollar and other currencies.

Canada’s economy contracted in the final quarter of last year. It weakened a bit further in Q1, but incoming data suggest that the first-quarter figure was weighed down by the 10% surge in imports, which has already reversed in the newly released April merchandise trade data. The flash estimate for April GDP is a more solid 0.4% quarter-over-quarter level (or 1.6% at an annual rate). The central bank expects growth to rebound in Q2, but even so, the economy is expected to remain in excess supply.

As expected, Canadian CPI inflation rose to 2.8% in April. Measures of core inflation declined to about 2%, and the share of CPI components growing above 3% is close to its historical average. Food price inflation moderated but remains high, and shelter inflation continued to slow. With global oil prices still elevated—roughly $10 per barrel above our April MPR assumptions—total inflation is expected to hover around 3% in the near term before gradually easing towards 2%.

In other news, the US CPI inflation report for May was released this morning:

• US inflation accelerated again in May as the war in Iran pushed up energy prices, outpacing wages for a second straight month. The US consumer price index climbed 4.2% from a year earlier, the most since early 2023.
• Core CPI, which excludes food and energy, increased 0.2% from April, a touch below expectations and taking some of the sting out of the Fed debate.
• The energy index rose 3.9% in May, accounting for over 60% of the monthly all-items increase.
• But other categories saw slower gains or outright declines: Grocery prices rose 0.1%, while transportation services, health insurance and new vehicle prices fell.
• The breadth of price increases also declined, providing another sign that inflation has likely peaked.
• The S&P 500 opened lower while Treasuries and the dollar wavered on the news.

Overall, today’s US CPI report sent a clear signal that consumers are pulling back on nonessential spending, pushing back against businesses’ attempts to raise prices. This should ease fears of Fed rate hikes following the blowout May payrolls report. Bloomberg News suggests that they still expect the Fed to hold rates steady at the June 12 meeting and to cut the overnight fed funds rate by 25 basis points in the fourth quarter of this year.

Bottom Line

The Bank of Canada has shown its willingness to bolster the Canadian economy amid unprecedented trade uncertainty and a record oil price shock. Ottawa, too, has taken actions to reduce the burden of higher prices on Canadians by temporarily eliminating the excise tax on oil. PM Carney is also working to diversify Canada’s trade away from the US, a strategy that has thus far been remarkably successful. As the charts below show, Canadian export diversification is gaining momentum. In addition, goods imports are also shifting away from the US to the rest of the world.

We continue to maintain the view that the Bank of Canada will keep rates steady this year. If inflation broadens and accelerates, rate hikes are possible, but that is not our baseline forecast. The Bank of Canada will be reluctant to tighten into housing market weakness. While housing activity strengthened in May, momentum is muted, and affordability improvements are likely to taper off in the coming months as trade tensions and the war keep oil prices and interest rates elevated.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

So Much For Recession Worries, The May Jobs Report For Canada Was A Blockbuster

Canadian employment surged 87,800 in May, the strongest reading since 2024. Today’s Labour Market Survey dispels recession concerns, but leaves the Bank of Canada open to a possible rate hike later this year or next if inflation remains troubling. The Canadian economy continues to show resilience in the face of tariffs and oil price increases.

The headline job gain, combined with a 3,800 rise in the size of the labour force, drove the unemployment rate down three basis points to 6.6%. The jobless rate is still in the 6.5%- 7.0% range seen over the past year. The employment rate rose 0.2 percentage points to 60.7%.

The report’s details were also stronger than expected. The unemployment rate for youth declined 0.9 percentage points to 13.4%. The rate also fell among core-aged women (-0.4 percentage points to 5.5%) and core-aged men (-0.4 percentage points to 5.7%).

Employment increased in several industries, most notably in construction (+27,000; +1.7%), information, culture and recreation (+19,000; +2.3%), transportation and warehousing (+19,000; +1.7%) and accommodation and food services (+17,000; +1.5%). On the other hand, employment decreased in wholesale and retail trade (-35,000; -1.2%).

Hiring also rose in manufacturing in May (+15,000; +0.8%). Hiring in this industry was little changed compared with 12 months earlier, but down 44,000 (-2.3%) from January 2025. The manufacturing sector has faced heightened economic uncertainty since early 2025, driven by U.S. tariff policies.

Employment rose in Ontario (+42,000; +0.5%), British Columbia (+25,000; +0.9%), Alberta (+14,000; +0.5%), and Prince Edward Island (+1,200; +1.3%), while it fell in Saskatchewan (-6,100; -1.0%).

Average hourly wages among employees increased 3.0% (+$1.10 to $37.24) on a year-over-year basis in May, following growth of 4.5% in April (not seasonally adjusted).

Hiring gains in May were the first significant job growth since November 2025. The increase in May follows a net decline of 112,000 (-0.5%) over the first four months of 2026. On a year-over-year basis, employment was up by 147,000 (+0.7%) in May.

The number of people working full-time rose by 154,000 (+0.9%) in May. The increase in the month offsets a downward trend observed from January to April, in which the number of full-time workers fell by 156,000 (-0.9%). In May, part-time employment decreased by 66,000 (-1.7%).

Employment rose among employees in both the private sector (+56,000; +0.4%) and the public sector (+20,000; +0.4%) in May. The number of self-employed workers was little changed.

Since the spring of 2024, the unemployment rate has remained above its average (6.0%) observed from 2017 to 2019, prior to the COVID-19 pandemic. The unemployment rate reached a recent peak of 7.1% in August and September 2025.

As employment picked up in May, the job-finding rate ticked up, with just over one-quarter (26.3%) of people who were unemployed in April found work in May. This was up 3.7 percentage points compared with the same period last year but remained below the pre-pandemic average for the corresponding months from 2017 to 2019 (31.5%). At the same time, the layoff rate remained relatively stable at 0.6%, little changed compared with a year earlier and in line with the pre-pandemic average (not seasonally adjusted).

The unemployment rate in the Toronto census metropolitan area fell 1.1 percentage points to 6.8% in May, the lowest level since November 2023. The rate in May 2026 was down from a recent peak of 9.0% in May 2025 and July 2025. Recent declines in Toronto have brought its unemployment rate closer to the rate observed in Montréal (6.5%) and Vancouver (6.4%) in May 2026.

The jobless rate also fell in Montréal (-1.2 percentage points) in May, largely offsetting the increase recorded in the previous month. In Vancouver, the unemployment rate decreased 0.6 percentage points to 6.4%. In both Montréal and Vancouver, the unemployment rate in May was virtually unchanged year over year.

In separate news, US hiring also surged in May, boosting bets on a Fed rate hike. Stocks and bonds in Canada and the US sold off on the news. US job growth topped all forecasts in May, and the unemployment rate held steady at 4.3%, offering the clearest sign yet that the labour market may be breaking out of a prolonged period of lacklustre hiring.

Nonfarm payrolls increased 172,000 last month, and hiring in March and April was stronger than previously reported, according to Bureau of Labour Statistics data out Friday. Taken together, the figures marked the strongest three-month advance in more than two years.

Bottom Line

These blockbuster jobs reports, accompanied by inflation risk stemming from high tariffs and the war in Iran blocking the Strait of Hormuz, are troubling for both stocks and bonds.

The relative weakness of the Canadian labour market will discourage the Bank of Canada from tightening monetary policy too soon. To be sure, inflation remains a risk as higher energy costs become embedded in the price of a wide array of goods and services. The Bank will be reluctant to respond with rate hikes over the next few announcement dates.

Trade negotiations are accelerating as the future of CUSMA is determined. It is hard to imagine the Bank of Canada tightening in the face of such a weak housing market. Early evidence suggests housing activity picked up in May, but the sector remains vulnerable to rising interest rates. Although both the Fed and the BoC have remained on the sidelines so far this year, market-driven interest rates have risen considerably owing to the sharp rise in inflation pressures. Housing is a much larger component of economic activity in Canada than in the US. The Bank of Canada, therefore, will be particularly leery of tightening monetary policy. We hold to the view that central bank rate hikes in Canada and the US are unlikely this year.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca