U.S. consumer price inflation continued its upward climb in May, with the headline Consumer Price Index (CPI) rising 0.5 per cent month-over-month, in line with consensus expectations. On a year-over-year basis, prices increased 4.2 per cent, the highest reading in three years and a notable acceleration from the 3.8 per cent recorded in April.
May marked the third consecutive month of elevated inflation, with prices averaging approximately 0.7 per cent per month since conflict in the Middle East disrupted traffic through the Strait of Hormuz. Energy prices remained the dominant driver, rising 3.9 per cent during the month, led by a 7.0 per cent surge in gasoline prices, which now stand approximately 41 per cent above year-ago levels.
Excluding volatile food and energy components, core CPI rose a modest 0.2 per cent in May, below the 0.3 per cent consensus forecast. However, the year-over-year rate edged up to 2.9 per cent, its highest level in seven months. Apparel prices continued to climb, up 4.8 per cent from a year earlier, reflecting the pass-through effects of tariffs on consumer goods. Meanwhile, producer prices increased 1.1 per cent month-over-month and 6.5 per cent year-over-year, a 42-month high.
May 2026: A Potential Peak in the Inflation Cycle
Notwithstanding the headline shock, there are credible grounds to view May as the high-water mark for the current inflation surge. David Kelly, Chief Global Strategist at J.P. Morgan Asset Management, points to four conditions that support a meaningful disinflation path in the months ahead.
First, energy prices have already begun to retreat. Gasoline peaked at $4.56 per gallon on May 21 and has since fallen to $4.07, pointing to a lower year-over-year headline reading in June. Second, an interim peace agreement between the United States and Iran, if sustained, could restore traffic through the Strait of Hormuz and gradually normalize global energy supply chains. Third, judicial rulings against IEEPA tariffs have reduced the estimated average tariff rate from approximately 11.5 per cent of goods imports in late 2025 to roughly 7.8 per cent today, with further moderation toward 7.5 per cent considered the baseline scenario. Fourth, shelter cost pressures are expected to continue easing. Private market data from Zillow and Apartment List show year-over-year rent changes on new leases ranging from -1.7 per cent to +1.8 per cent, well below the pace currently reflected in CPI. Meanwhile, rental vacancy rates have risen to 7.3 per cent, their highest level since 2017, reflecting softer demographic demand.
Critically, wage growth has not accelerated in response to higher prices. Average hourly earnings rose just 3.45 per cent year-over-year in May, the second-smallest increase in five years, while real wages declined for a second consecutive month. The absence of a wage-price spiral remains an important constraint on inflation persistence. Against this backdrop, J.P. Morgan Asset Management’s baseline forecast calls for CPI inflation to ease to approximately 3.3 per cent by December 2026, before declining further to around 1.8 per cent by May 2027 and stabilizing near the Fed’s 2 per cent target thereafter.
Implications for Canadian Mortgage Borrowers
The persistence of U.S. inflation above the Federal Reserve’s 2 per cent target supports the widely held expectation that the Fed will hold the federal funds rate in its current 3.50 to 3.75 per cent range and abandon its easing bias at this week’s meeting. The emerging disinflationary trend, however, tempers the risk of outright rate hikes. We expect the Fed to resist the rate increase currently priced into futures markets later this year, with rate cuts potentially resuming in 2027 as both economic growth and inflation moderate.
The Bank of Canada held its overnight rate at 2.25 per cent for a fifth consecutive meeting in June, with Governor Macklem acknowledging the challenge of balancing rising inflation against economic weakness. If the downward tariff trend identified by Kelly continues, it would give the Bank of Canada greater flexibility to lower rates in the event of deteriorating economic conditions.
For Canadian mortgage borrowers, the near-term picture remains one of elevated borrowing costs. Fixed mortgage rates are tied to Government of Canada bond yields, which are influenced by North American interest rate expectations and, increasingly, by longer-term fiscal dynamics. Looking ahead, long-term interest rates are likely to drift gradually higher, driven less by monetary policy and more by rising government debt on both sides of the border. Borrowers facing renewal in the near term should plan for rates broadly in line with current market conditions, although the projected disinflation trend could provide more meaningful relief as 2027 approaches.
Housing Affordability Watch
CMI monitors the latest developments and offers insights on solutions to Canada’s housing affordability crisis
In our latest Housing Affordability Watch, we look at Brian Potter’s recent essay “Where Are the Economies of Scale in Homebuilding?”. Building on his broader work on construction.
