Highlights:
- After May’s CPI fell short of expectations, inflation surprised to the upside in June with the headline rate jumping to 2.5% from 2.2%.
- The pickup in inflation relative to this time last year (when headline was at 1.0%) reflects higher energy prices, a reversal of food price deflation, and firmer underlying price growth.
- The BoC’s core measures averaged 2.0%. Ex food and energy inflation is slightly slower at 1.8%.
Our Take:
Today’s jump in headline inflation was a bit firmer than markets expected. Ditto for the Bank of Canada with the Q2 average coming in 0.1 ppt higher than their latest forecast (an admittedly small miss, but they already had two months of data). The increase in June was largely an energy story as gasoline prices were up 25% from a year ago, the fastest pace since 2011. The central bank is expecting a modest, energy-driven overshoot of their 2% inflation target—that actuals are coming in a touch higher won’t be too alarming. The BoC’s core measures were little changed, averaging 2% as they have for much of the year. In recent communications Governor Poloz has said, front and centre, “inflation is on target and the economy is operating close to capacity.” Today’s data is consistent with that. So the bank’s new mantra that a gradual approach to tightening is warranted remains, well, warranted.
June’s CPI reading is the last before Canada’s retaliatory tariffs on $16.6 billion of US imports took effect July 1. The BoC has estimated a fairly modest 0.1 ppt upward impact on CPI from those countermeasures. They’ll likely just add that to the list of factors temporarily boosting inflation—alongside energy prices, exchange rates pass through, and higher minimum wages. We doubt monetary policy will respond to those transitory factors. But some food for thought: the bank’s latest Business Outlook Survey showed inflation expectations are shifting toward the upper half of their 1-3% target band. In that context Governing Council might be a bit more concerned about higher inflation readings (transitory or not) feeding through into expectations.
