Canada inflation jumps to 29-month high as oil prices rise

Canada's annual inflation rate rose to 3.2% in May, reaching a 29-month high and moving outside the Bank of Canada's 1% to 3% target range for the first time in nearly two and a half years. The increase was driven in large part by petrol prices, which climbed 33.2% year on year, according to Statistics Canada. The data were released on Monday and point to a sharp rise in living costs at a time when energy markets have been unsettled by tensions involving Iran.

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The monthly inflation rate also increased by 1% in May, the strongest monthly gain in 15 months. Transportation costs rose 9% from the previous month, reflecting the impact of higher fuel prices on wider consumer spending. Overall consumer prices were up 2.2% on an annual basis, while food prices increased 3.8%, led by higher costs for fresh fruit and vegetables.

The figures suggest that energy prices remain the main driver of the latest inflation spike, rather than a broad-based acceleration across the economy. Statistics Canada said petrol prices in May recorded their biggest annual increase since Russia invaded Ukraine. Shelter costs rose 1.7% in May, easing slightly from a 1.8% rise in April, helped by a small decline in mortgage costs.

The Bank of Canada has already said it sees limited evidence that higher energy prices are feeding into wider inflation pressures. The reading matters because it comes as affordability has become a political issue for Prime Minister Mark Carney, whose party won a parliamentary majority in April. Higher inflation can affect household budgets, wage expectations and the central bank's next policy decisions, even when the immediate cause is concentrated in one sector.

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It also highlights how global oil price swings can quickly feed into domestic prices in an economy such as Canada's. The latest move follows a period in which oil markets were pushed higher by US-led tensions with Iran, lifting petrol costs in Canada. Analysts cited in the data release said the May figure may prove to be the near-term peak if June fuel prices continue to ease after an interim peace deal between the United States and Iran.

That would mean the inflation spike could be temporary, but the June data will be watched closely for confirmation. What remains unclear is how quickly lower fuel prices will filter through to the broader inflation measure and whether other categories will stay elevated. The Bank of Canada will likely assess whether the May reading was an isolated energy-driven jump or the start of a wider trend.

For now, the data underline the sensitivity of Canada's inflation outlook to global oil markets and geopolitical developments.

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