What goes up sometimes comes down
The price of oil was a key theme this week.
May's inflation report confirmed what consumers have already been feeling: higher gasoline prices pushed Canada's headline inflation rate up to 3.2%. That's painful. But it could become even more painful if elevated energy prices—and their ripple effects throughout the economy—persist. In that case, the Bank of Canada could be forced to raise interest rates.
At the same time, an interim peace agreement between the U.S. and Iran, along with increased shipping through the Strait of Hormuz, has helped drive oil prices lower. If this trend continues, the recent spike in inflation could prove to be—borrowing a term that didn't age particularly well during the post-pandemic inflation surge—"transitory."
Along with enjoying some summer sunshine, the team at ATB Economics will be keeping a close eye on inflation and developments in the Middle East. While inflation risks have eased following the peace agreement, we continue to expect oil prices and inflation to remain above pre-conflict levels. As a result, our view remains that the Bank of Canada will keep interest rates on hold this year as it balances elevated inflation against sluggish economic growth.
The Canadian dollar also continued to weaken against the U.S. dollar this week. The loonie has fallen to its lowest level of the year, trading just above 70 U.S. cents, down from more than 74 cents in January. The decline reflects strong demand for U.S. dollars—partly driven by signals from the Federal Reserve that U.S. interest rates could remain higher for longer—along with lower oil prices and a soft Canadian economy. Hopefully, next week's April GDP report will show the economy entered the second quarter on firmer footing than it did in the first.
A weaker loonie is a double-edged sword. It contributes to inflation by making imports from the U.S. more expensive, but it also makes Canada a more attractive destination for American tourists and provides a boost to Canadian exporters.
Meanwhile, tech stocks experienced a volatile week, serving as a reminder that many questions remain about the AI boom. The biggest question is whether artificial intelligence can deliver the productivity gains many expect without significantly increasing unemployment. It's another issue that will keep the team at ATB Economics busy throughout the summer.
