Canadian Inflation Eases, But Details a Mixed Bag

Headline CPI inflation decelerated in June to 2.7% year-on-year (y/y), right on consensus expectations and below last month’s 2.9% y/y print.

The deceleration was led by gasoline prices, which dropped 3.1% month-on-month (m/m), compared to the +5.6% m/m gain last month. This follows OPEC+’s announcement of the phase out of prior production cuts.

Lower prices for durable goods (-1.8% y/y) also lent a hand, driven by price declines for passenger vehicles (-0.4% y/y). The Statcan note called out the “reduction in prices for used vehicles (-4.5%) amid improved inventory levels compared with a year ago.”

However, services inflation edged higher to 4.8% y/y (from 4.6% y/y in May). This was driven by still high shelter inflation (+6.2% y/y), which has been led by an 8.8% y/y increase in rent and a 22.3% y/y increase in mortgage interest costs.

The average of the Bank of Canada’s preferred “core” inflation measures held steady at 2.8% y/y in June. On a three-month annualized basis, the average moved to 2.9% in June from 2.5% in May.

Key Implications

Today’s CPI report was a bit of a mixed bag. While headline inflation got back on track in June, the three-month annualized pace of core inflation has now been rising for three straight months. This infers that the annual pace of inflation should remain in the upper end of the BoC’s 1% to 3% range over the coming months. This has been propelled, not just by shelter prices, but also by price gains in “nice-to-haves” like the cost of dining out, health spending, and household operations.

The BoC is set to make a rate announcement next week and today’s report has increased odds of back-to-back rate cuts. Recent data have supported a cut, with the job market loosening and wage gains decelerating from elevated levels. From our view, the story hasn’t changed. The BoC is in a cutting cycle. Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next.