Canada Inflation Cools to 2.8%, Slowest Pace in More Than Two Years — 2nd Update

The further deceleration in inflation in June was fairly broad-based, though again also reflected year-earlier comparisons to when gasoline prices were driven higher by increased demand from China as the big fuel importer relaxed some Covid-19 health restrictions. Food prices and mortgage interest costs also remained elevated for Canadians.

Inflation was last below the top end of the Bank of Canada’s 1% to 3% target range in March 2021.

Two measures of core inflation the Bank of Canada closely monitors, weighted median and trimmed mean, cooled only slightly in June to an average 3.8% from 3.9% the month before, Statistics Canada said. The measures have remained in a 3.5% to 4% window on a three-month basis since last September, well above the central bank’s 2% target and one factor the bank pointed to in last week’s decision to again lift interest rates.

Compared with May, CPI edged up 0.1% for the month, weaker than the consensus expectation for the index to rise 0.3% month-over-month. On a seasonally-adjusted basis, inflation also rose 0.1% on-month.

For economists, the latest data continue to show inflation is headed in the right direction and should temper inflation expectations but don’t close the door on possible further rate rises after the Bank of Canada’s summer break, when it will have further indicators on hand, including another month’s inflation report.

“The upshot is that, despite some encouraging signs in June, the Bank still needs to see broader improvements before it can be confident that headline inflation will return to 2% on a sustained basis,” said Capital Economics deputy chief North America economist Stephen Brown.

Inflation has cooled steadily since the Bank of Canada began its aggressive rate-raising campaign more than a year ago, though the bank has said it is concerned that downward pressures are at risk of stalling with growth in Canada surprisingly strong and the economy remaining in excess demand. The bank last week boosted its main policy rate a further one-quarter percentage point to a fresh 22-year high of 5.0% and cautioned it rates could be increased again if inflation doesn’t cool as expected.

The Bank of Canada forecasts economic growth will moderate and inflation will ease, though this is anticipated to take longer than it was anticipating earlier in the year. It expects economic growth to average about 1% through the second half of this year and the first half of next year, while CPI inflation is set to remain about 3% for the next year before declining gradually to its 2% target in the middle of 2025. Bank policymakers next decide on the interest rates Sept. 6, when they will have one more CPI report to consider.

Transportation was a big driver of inflation cooling in June, due to an almost 22% drop in gas prices following a roughly 18% drop in May. Consumers also saw prices for travel tours rise at a slower pace than a year ago, and prices were down sharply for cellular services due to cheaper cell phone plans and promotional pricing, Statistics Canada said.

Grocery prices, however, were up 9.1% from a year earlier, roughly matching May’s pace, with higher prices for a range of products.

Excluding volatile food and energy prices, Canada’s CPI rose 3.5% in June from a year earlier, after a 4.0% gain in May.

Economists expect some inflationary pressures to return in the coming months, with June likely to have seen the biggest drag from energy prices on a year-over-year basis as crude oil prices peaked the same month last year.

“The factors at play that weighed on headline inflation seem likely to dissipate moving forward, meaning the champagne will need to remain on ice for the time being,” said Simon Harvey, head of foreign exchange analysis at Monex Europe and Canada, who said the odds of a rate increase in September have fallen slightly to 20% and now sit at about 40% for an October rise.

Write to Robb M. Stewart at [email protected]