Inflation Update – May 2022

Another month has come and gone, and that means new inflation statistics have been announced. A couple weeks ago, the US statistics were reported and this last week Canada reported their stats. Many were surprised that inflation increased as much as it did.

Below we want to look at both Canada and US inflation statistics like we have in past updates. See below for updated graphs, and potential outcomes. If you want more information and want to read our previous thoughts on inflation check out the following:

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Canadian Inflation

You know the saying, April showers bring May flowers? Maybe we have to change that to April inflation brings more May inflation. Doesn’t quite have the same ring to it, I know. But man, oh man, did the May inflation statistics go flying past expert projections.

Economists were expecting May inflation to be reported at 7.4%, still way above the Bank of Canada’s 1% – 3% target. However, it came in at a staggering 7.7%. The central bank did raise interest rates by 0.5% on June 1 to try and help combat inflation. This is not accounted for in the most recent reports, as it didn’t happen during May. Economists are also forecasting a 0.75% increase in interest rates for the July meeting.

The 7.7% year-over-year inflation is the highest it has been reported since 1983. The biggest contributors to inflation this month were Gas, clothing/footwear, and non-durable goods. On an annual basis, the largest contributors were much the same; Gas, non-durable goods, food, and shelter.

We want to go through the same exercise as last month and see how accurate what we predicted last month was and what we could see going forward. If you haven’t read last month’s update, I would start there as we won’t be as detailed this month.

Current Inflation

In the chart below you can see the current CPI and Inflation numbers going back to March of 2020. The red trend line shows us that if the current trend continues, we should end the year around ~152 – 153. Likely not going to be the case since we are essentially there already with how hot inflation has been the last couple of months.

The month-over-month increase for May 2022, is the second-largest increase over the below reporting period trailing only March of 2022.

Inflation Looking Forward

Last month we presented the same 2 scenarios below. Both of our scenarios showed inflation at 6.8%, we knew that this was going to be very conservative. We also mentioned that even though, April broke the trend of monthly increases steadily climbing, it did not signal the start of a new trend. This meant that it didn’t warrant presenting a scenario where we see inflation drop. That still holds true. Plus, if inflation were to drop, no one would complain.

As mentioned we use the same two scenarios below, both of which are likely on the conservative side again. However, with the interest rate increases, we could see the June month-over-month change be more reasonable than in previous months. So our scenarios might not be as overly conservative.

As you can see below, our more conservative scenario shows CPI finishing out the year past 156 now, nearly as high as the aggressive scenario was last month. This would mean inflation finishes out the year at nearly 8.5%. As for June 2022, we could see it pushing closer to 8%.

Our more aggressive scenario shows CPI passing the 158 threshold. This means inflation would peak at the end of the year at just shy of 10%. What a great Christmas season that would be. As for the shorter term, next month could likely break the 8% threshold.

US Inflation

US inflation, although still way above its target and above Canada currently, has not been running as hot in 2022 as Canada. In May it was reported at 8.5%, just slightly below the March report.

In the chart below, we see that US inflation is still more than 0.75% higher than Canada. However, Canada’s month-over-month increases for every month in 2022, have been larger than the US. We can also see that based on the red trend line, US CPI should close out the year just under 300. This is still higher than our previous updates.

If we compare the May report to last month, our scenarios were once again on the conservative side. Both of our US projections last month had inflation between 8% – 8.2%.

US Inflation Through 2022

Using the same parameters that we did last month. In our more conservative scenario of only 0.5% monthly increases, it shows that inflation has now peaked and that next month would be around 8.1%. This is due to the fact that the month falling off, May 2021, had higher inflation than the 0.5% monthly estimated increase.

This scenario is likely too conservative based on current trends. However, the US has raised rates and is considering a pause on the gas tax to help with price increases. If the interest rates do what the federal reserve is hoping, and if the pause on the gas tax is implemented we could hopefully, see inflation cool slightly.

Our more aggressive scenario below shows that inflation has not yet peaked. According to the charts below, in the US, it could peak around 9% – 9.25% later in the year.

The Affect of Energy Prices

We mentioned this last week but it is probably worth mentioning again. According to some research and reports, it is estimated that the rising cost of energy accounts for anywhere from 80% to 90% of inflation. If this is the case, which makes sense logically, the US pausing tax on gas could pay dividends and help cool off inflation.

One of my main concerns is that a pause on gas tax may cause a demand shock. Even if the pause is short-term, will it cause more people to buy gas now? Will people move vacations and road trips up because fuel is cheaper? Will farmers and businesses purchase more fuel now while it’s cheaper? If there is a demand shock, is there enough new supply to keep up or are we going to have to dip into reserves?

Assuming there is a demand shock, will it cause prices to go higher again even with no tax? If that is the case, after the temporary pause in the gas tax, will fuel prices be even higher than they are now because our supply and reserves are even more depleted? This all remains to be seen. However, if implemented it should at the very least help to alleviate some strain in the short term.


In 2021 Canadian CPI and Inflation were lagging behind the US. However, in 2022 the month-over-month change in Canada has outpaced the US. Furthermore, at the time of this writing US rates are 0.25% higher, meaning that it should curb inflation slightly more. Additionally, if it is true that a majority of inflation can be attributed to energy costs, the pause on gas tax in the US should help to bring it down in the short term. Whether this will cause a demand shock is yet to be seen.

Central banks are planning more rate hikes, with the word on the street being that Canada will raise rates another 0.75% in July 2022. It will be interesting to see the June reports in a month’s time and see if the recent 0.5% interest rate increase had any effect on inflation. For now, based on our simple modeling and current trends it is very likely that inflation could be pushing 10% within the calendar year in both Canada and the US.

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