Inflation expected to rise in May for third straight month

The publication of Canada’s May Consumer Price Index (CPI) figures on Monday will be the focus of attention. Indeed, Statistics Canada data will provide markets with an update on price pressures following its June 10 meeting, where policymakers kept the interest rate steady at 2.25%, matching the broad consensus.

Economists expect the headline CPI to rise by 2.9% in the year to May, still above the Bank of Canada’s (BoC) target and up from April’s 2.8% annual increase. On a monthly basis, prices are expected to rise by 0.7%. The bank will also closely monitor its core measure (which strips food and energy costs), which is expected to rise by 2.2%, up from 2.1% YoY in the previous month.

Following the US-Iran deal, the geopolitical premium on crude Oil prices should dissipate, reducing inflationary pressure from this source and leaving US tariffs as the sole potential driver of increases in consumer prices.

What can we expect from Canada’s inflation rate?

Inflation gained some momentum in April, and market participants appear to bet on further continuation of this trend in May.

At its latest gathering, the BoC left its policy rate unchanged at 2.25%. Governor Tiff Macklem repeatedly emphasised that any future policy move would depend on evolving economic conditions rather than on a predetermined timetable. He also highlighted that core inflation has edged lower and reiterated that weakness in the Canadian economy continues to exert downward pressure on prices.

So far, market participants expect just over 22 basis points of tightening by year-end.

Furthermore, the bank’s preferred gauges, CPI-Common, Trimmed Mean, and Median, also moderated, but at 2.5%, 2.0%, and 2.1%, respectively, they continued to run above the bank’s goal.

When is the Canada CPI data due, and how could it affect USD/CAD?

Markets will fully focus on Monday at 12:30 GMT, when Statistics Canada publishes May’s inflation figures. If inflation continues to pick up momentum, the likelihood of further rate hikes could increase, giving some air to the Canadian Dollar (CAD).

Pablo Piovano, Senior Analyst at FXStreet, notes that USD/CAD has been on a steady uptrend since the beginning of May, almost entirely tracking developments from the Middle East conflicts and the US Dollar’s (USD) price action.

Piovano points out that USD/CAD is trading at levels last seen in April 2025, well north of 1.4100. The continuation of this move could challenge the April 2025 peak at 1.4414 (April 1).

On the flip side, he highlights initial support at the vital 200-day SMA around 1.3820, closely followed by the provisional 55-day and 100-day SMAs at 1.3794 and 1.3751, respectively. South from here emerges the May base at 1.3549 (May 1), seconded by the March floor at 1.3525 (March 9) and the February valley at 1.3504 (February 11).

“Momentum could prompt some technical correction,” he adds, noting that the Relative Strength Index (RSI) is navigating comfortably in overbought levels past 86, while the Average Directional Index (ADX) above 44 suggests the underlying trend remains robust.

US-China Trade War FAQs

Generally speaking, a trade war is an economic conflict between two or more countries due to extreme protectionism on one end. It implies the creation of trade barriers, such as tariffs, which result in counter-barriers, escalating import costs, and hence the cost of living.

An economic conflict between the United States (US) and China began early in 2018, when President Donald Trump set trade barriers on China, claiming unfair commercial practices and intellectual property theft from the Asian giant. China took retaliatory action, imposing tariffs on multiple US goods, such as automobiles and soybeans. Tensions escalated until the two countries signed the US-China Phase One trade deal in January 2020. The agreement required structural reforms and other changes to China’s economic and trade regime and pretended to restore stability and trust between the two nations. However, the Coronavirus pandemic took the focus out of the conflict. Yet, it is worth mentioning that President Joe Biden, who took office after Trump, kept tariffs in place and even added some additional levies.

The return of Donald Trump to the White House as the 47th US President has sparked a fresh wave of tensions between the two countries. During the 2024 election campaign, Trump pledged to impose 60% tariffs on China once he returned to office, which he did on January 20, 2025. With Trump back, the US-China trade war is meant to resume where it was left, with tit-for-tat policies affecting the global economic landscape amid disruptions in global supply chains, resulting in a reduction in spending, particularly investment, and directly feeding into the Consumer Price Index inflation.

Economic Indicator

BoC Consumer Price Index Core (MoM)

The BoC Consumer Price Index Core, released by the Bank of Canada (BoC) on a monthly basis, represents changes in prices for Canadian consumers by comparing the cost of a fixed basket of goods and services. It is considered a measure of underlying inflation as it excludes eight of the most-volatile components: fruits, vegetables, gasoline, fuel oil, natural gas, mortgage interest, intercity transportation and tobacco products. The MoM figure compares the prices of goods in the reference month to the previous month. Generally, a high reading is seen as bullish for the Canadian Dollar (CAD), while a low reading is seen as bearish.