Inflation in Canada continued to recede in June, easing back into the central bank’s target range for the first time in more than two years. Despite some signs of underlying inflation pressures that remain stubborn, this development is a positive sign for the Canadian economy.
According to Statistics Canada, Canada’s consumer price index (CPI) climbed 2.8% in June compared to the previous year. This figure is significantly lower than last summer’s peak of 8.1%. Market expectations were set at a 3% advance, following a slight dip to 3.4% the previous month.
When compared with May, the CPI only edged up 0.1% for the month, falling short of the consensus expectation of a 0.3% increase. On a seasonally-adjusted basis, inflation rose by just 0.1% month-over-month.
Notably, annual inflation last fell below the top end of the Bank of Canada’s 1% to 3% target range back in March 2021.
The deceleration in inflation in June was fairly broad-based, with one notable factor being the sharp drop in gasoline prices compared to a year earlier. During that period, costs at the pump were boosted by heightened demand from China, as the significant fuel importer relaxed some Covid-19 health restrictions. Additionally, food prices and mortgage interest costs also remained elevated for Canadians.
While inflation has been steadily cooling due to the central bank’s rate-raising campaign, concerns remain regarding potential downward pressures stalling. This is especially true considering the unexpectedly strong growth in Canada and the economy remaining in excess demand. In response to these concerns, the Bank of Canada recently raised its main policy rate by a further one-quarter percentage point, reaching a fresh 22-year high of 5.0%. The bank has also cautioned that it may continue to increase interest rates if inflation fails to cool as anticipated.
Bank Expects Moderation in Economic Growth and Inflation
The bank maintains its expectations for a slowdown in economic growth and a decrease in inflation, although the timeline for these changes has been extended compared to previous forecasts. The bank projects that economic growth will average around 1% in the second half of this year and the first half of next year. Meanwhile, CPI inflation is predicted to remain at approximately 3% for the next year before gradually declining to reach the bank’s target of 2% by mid-2025.
Interest Rates Decision and CPI Report
Bank policymakers will make their next decision on interest rates on September 6th. They will take into consideration the forthcoming CPI report along with other relevant factors.
Core Inflation Measures
The Bank of Canada closely monitors two core inflation measures: weighted median and trimmed mean. In June, these measures only experienced a slight cooling, dropping from an average of 3.9% the previous month to 3.8%. Over the past nine months, these measures have consistently averaged between 3.5% and 4%.
Impact of Transportation and Other Factors on Inflation
In June, transportation played a significant role in cooling inflation, primarily due to a substantial 22% decrease in gas prices following an 18% drop in May. Additionally, the price increase for travel tours was slower compared to the previous year, and cellular services also experienced a sharp decline in prices.
However, grocery prices rose by 9.1% compared to the previous year, mirroring the increase seen in May. Higher prices for various products contributed to this upward trend.
Excluding Food and Energy Prices
If we exclude the impact of volatile food and energy prices, Canada’s CPI rose by 3.5% in June from the previous year, marking a decrease from the 4.0% gain observed in May.
