Consumer prices rose again in May — but has inflation peaked?

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Canadian policy makers likely heaved a sigh of relief at Monday's inflation numbers.

The year-over-year rate surged to 3.2 per cent in May. Gasoline was up 33.2 per cent. Grocery prices were up, driven by produce (which requires a lot of diesel to grow and ship). Tomato prices were up 45.2 per cent.

That's all been tough on consumers, struggling in a weak economy to keep their heads above water. And yet the relief is that the surge in prices remained largely contained to energy and energy-sensitive areas.

"Headline inflation likely peaked in May," wrote Michael Davenport, senior Canada economist at Oxford Economics, in a research note. He says gasoline prices have already fallen about 10 per cent from their peak last month.

Economists look to measures of so-called core inflation that strip out more volatile components to see what's happening under the surface.

"There were no signs of a significant broadening of inflation across the CPI basket, and both Bank of Canada preferred core inflation measures were unchanged at about two per cent year over year," he wrote.

But Canada is not out of the woods yet.

Sure, energy prices have come down from their peak. The main international benchmark for oil prices, Brent crude, rose to $118 US in April as the war between the U.S., Israel and Iran dragged on. It opened trading this week at $77.

But that's still well above where prices were before the war began — Brent crude was trading at $60 in January. And even as talks to end the war continue in Switzerland, there are clear risks the Strait of Hormuz won't return to normal operations any time soon.

“Even if the Strait of Hormuz fully and permanently reopens today, which is unlikely, the repercussions for prices and inflation will continue for months,” said economist Jim Stanford from the Centre for Future Work.

The longer that energy prices remain high, the more likely it becomes that businesses pass that increase on to consumers. Stanford says businesses use about twice as much petroleum as consumers, so the force of that increase in energy prices has a larger impact on those companies.

"We are already seeing some of those spillovers: airfares, travel and tour costs, delivery charges, food (produce in particular has a lot of ‘diesel’ built into its cost)," he said in an email last week.

And that's precisely what the May numbers showed.

Transportation costs were up. Travel and tourism increased. Food prices were up, with tomatoes leading the charge. But Statistics Canada says those eye-popping tomato numbers may not be driven by what you think.

"Tomato prices rose 45.2 per cent in May due to supply contractions in Mexico, stemming from poor weather and a reduction in planted acreage following the implementation of U.S. tariffs," wrote StatsCan.

The bottom line is that May's surge came in hotter than expected. But for the most part, the price increases remained contained to the parts of the economy that were most predictable.

Anyone who's driven past a gas station this month knows prices have already retreated quite a distance from the peak, and that retreat will show up in the CPI data next month.

But so long as energy prices remain elevated compared to pre-war levels, there will be concern that businesses will pass those extra costs onto consumers.