Scotiabank Previews This Week's CPI Data in Canada

10:56 AM EDT, 06/23/2025 (MT Newswires) -- Canada refreshes the consumer price index for May on Tuesday at 8:30 a.m. ET and it's one of two inflation readings before the next Bank of Canada policy decision on July 30, said Scotiabank.

Governor Tiff Macklem's conflicting guidance has been that on the one hand, the BoC doesn't have confidence in the outlook amid all of the uncertainty in order to be able to provide guidance, but it will be closely watching the next two inflation reports before that meeting, nonetheless.

Headline CPI won't be what matters, but Scotiabank estimates a 0.4% month-over-month non-seasonally adjusted (NSA) rise that would mean the year-over-year rate would slip to 1.6%. Here are a few reasons for this estimate:

-- May is normally a seasonal up-month for CPI. Normally, folks come out of hibernation and in a rite of passage for new Canadians, start doing things like eating on patios and planting gardens. Seasonal price pressures in those areas can be "significant."

-- Notwithstanding the prior point, seasonal adjustment (SA) factors have recently been lower than for like months of May in history. 2024 and 2023 saw the lowest SA factors on record compared with like months of May. SA factors are calculated with a recency bias rooted in the pandemic and the immediate post-pandemic era that may not be suitable to now and going forward. Being lower than normal tamps down seasonally adjusted CPI.

-- There will be basket weight changes introduced by this report as part of StatsCan's annual exercise to refresh spending weights to the latest year's figures, which means 2024 in this case. No material effect is expected from this factor. Applying the new 2024 weights in lieu of the 2023 weights for the prior month of April, assuming no price changes themselves would have meant no material difference to that month's 1.7% y/y and -0.2% month-over-month SA readings. It expects StatsCan to include a sentence in its summary of the data like last year's: "The headline CPI for May 2024 would have been the same using the 2022 basket weights."

Now for two wildcard effects, pointed out the bank. May was wet and cold across much of Canada and more so than usual. This probably explains part of why StatsCan's guidance for May retail sales was a nominal decline of over 1% month-over-month SA. Less activity in weather-affected categories could be disinflationary, but June has improved and so some of that price pressure might just be pushed out.

And then there are tariffs, stated Scotiabank. Canada's retaliatory tariffs have been fairly small as a share of overall imports. Like the United States, it's unclear when to expect some pass-through into prices paid by consumers, given inventory being sold at pre-tariff prices, lagging supply chain responses, and at least a short-term tendency to absorb some tariffs in profit margins.

What will matter to the BoC, however, is what happens to the preferred core inflation readings- trimmed mean and weighted median CPI, according to the bank. You can't look at them in year-over-year terms (3.2% and 1.5% for median and trimmed mean, respectively) because they aren't spot calculations. They are slow moving month-over-month compounded readings that take in one new month and drop the earliest month out of 12 at a time. They adapt slowly, and Scotianank dones't have a great answer for why BoC officials or much of the street quotes such measures that are so slow to adjust to new information.

The second thing the bank doesn't understand is why BoC officials talk of core inflationary pressures as potentially just recent volatility, or 'ups and downs' as one deputy governor puts it. That's not true. For about a year now, these measures have been far above the BoC's 2% headline inflation target. The BoC has no evidence to lean on that this has been temporary or just a recent phenomenon.

The third thing Scotiabank doesn't understand is why the BoC remarks that these measures may overstate inflation. The BoC should be a "little more careful." If it overstates by a lot in a serially correlated fashion, then show the evidence. Otherwise, the bank thinks the BoC might be a touch overstated but not by anywhere enough to dismiss such a prolonged overshoot.

Back to Governor Macklem's emphasis on the next two inflation readings before the next decision on July 30. It's feasible Canada sees cooler month-over-month seasonally adjusted annual rate pressures in May off of the strong readings in April and effects cited above.

The measures exclude all taxes, including tariffs and so there will be no direct effect of tariffs on the core gauges, but there could well be indirect ones. A lousy two months of inflation data after overshooting for a year and with long and variable lags surrounding global supply chain responses to trade wars, should merit setting a higher standard for evaluating pressures than just two months, added the bank.

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