May 2025 CPI remains stable at 1.7%

Consumer price growth was a mixed bag last month, with shoppers still feeling the squeeze in the grocery store aisle, but more relief in terms of housing and energy costs.

Statistics Canada reports the annual pace of inflation growth was unchanged from April’s, at an increase of 1.7%. On a monthly basis, the Consumer Price Index ticked up 0.6%. Overall, the May print was in line with economist expectations, as the removal of the consumer carbon tax continues to pull down the headline number. However, there are signs that price measures are indeed cooling; removing energy from the basket shows inflation would have increased 2.7% year over year, down from the 2.9% recorded in April.

The core measures of inflation, which are closely monitored by the Bank of Canada (BoC), also lowered slightly, with the Median and Trim measures both coming in at 3%, down from 3.1% last month.

Dropping rents and mortgage costs pull inflation lower

In addition to the base effects from the carbon tax removal, StatCan says slower growth is due to smaller price increases for rents and mortgage interest costs. The shelter component of the CPI basket rose 3%, down from April’s 3.4% increase. Rents rose 4.5% year over year in May, compared to 5.2% in April, as rental unit supply increased while population growth slowed. Much of the slowdown was concentrated in Ontario which helped offset price growth in the other provinces.

Mortgage interest costs, meanwhile, continued to fall for the 21st month in a row, coming in at a year-over-year pace of 6.2%, from April’s 6.8%. Borrowers are paying overall less mortgage interest as rates have come down over the last year, due to a series of cuts from the BoC, as well as lower bond yields. The measure hit a high of 30.9% in August 2023.

Shoppers feel the burn at the grocery store and gas pump

However, consumers are still carrying the brunt of higher prices in their day-to-day lives; gas prices experienced a smaller decline in May than in April, down 15.5% compared to 18.1%, though overall prices were up 1.9% compared to the same timeframe last year.

Food prices, meanwhile, continue to outpace the headline inflation number, at 3.4%. However, that’s down slightly from 3.8% in April. Food purchased in stores specifically rose 3.3% in cost, as did food bought in restaurants.

Meanwhile, drivers are starting to feel the squeeze of higher prices; the cost to purchase a passenger vehicle rose 3.2%, while the price of auto insurance premiums soared by 8% year over year. This is due to a mix of factors including the fact that newer cars come with advanced technology and specialized parts, which make for higher replacement costs. Higher theft rates for certain makes and models have also been factored into insurance pricing, says Matt Hands, VP of Insurance at Ratehub.ca.

He adds that the evolving tariff scenario has also put upward pressure on auto insurance prices.

"Beyond vehicle-specific factors, economic pressures are driving insurance costs even higher. Insurers are now faced with inflated replacement costs and supply chain disruptions that can turn a simple repair into a more expensive, time-consuming claim," he says. "The 25% U.S. auto tariffs on vehicles and parts are expected to push prices up further, as manufacturers and repair shops pass these additional costs down to consumers. As insurance companies continue dealing with increasingly expensive claims from these economic factors, drivers can expect to see higher premiums upon renewals."

What does the May inflation number mean for the Bank of Canada?

While the Bank’s mandate is to keep the headline inflation number stable below 2% – which has been the case now for two consecutive months – it is keeping a laser focus on the core inflation measures, which strip out the high and low price change extremes to provide a clearer idea of how the measure is progressing. The May CPI report shows core inflation measures cooled by 0.1% each; while the BoC will be pleased to see downward movement here, it won’t be enough at this time to prompt another rate cut in its upcoming announcement on July 30th.

The central bank will need to see at least another month of compelling downward data to budge from its current holding pattern, particularly as the factors pulling inflation down – such as cooler energy costs – are largely temporary. Signals of a prolonged rate hold from the US Federal Reserve – also in response to stable American inflation – also give the BoC room to hold rates, without influencing our currency.

However, bank policymakers are also watching keenly for signs of tariff-induced economic weakness, particularly jobs and sectors such as manufacturing, which are especially sensitive to Mr. Trump’s trade war.

As Bank of Montreal Chief Economist Douglas Porter put it in an economic note out this morning, “... evidence is building that the economy is beginning to more fully feel the weight of U.S. tariffs, as the flash on manufacturing sales for May showed a 1.3% drop. The data over the next five weeks will ultimately drive the decision, but the odds of a July cut are lower now on the so-so CPI.”

The BoC’s trend-setting overnight lending rate underpins the pricing for lenders’ prime rates, which in turn influences variable mortgage rates and other loans, as well as the rate of return on savings and investing vehicles such as high-interest savings accounts, and GICs.

The next CPI report for June 2025 will be released on July 15.

Also read:

• Canadian CPI comes in at 1.7% in April as energy prices plunge
• Inflation and the Consumer Price Index in Canada
• Bank of Canada holds target interest rate at 2.75% in June 2025 announcement
• What is Canada’s overnight lending rate?
• The prime rate in Canada