Senior Director of Canadian Economics
Canada: Despite a Lower Headline, Underlying Inflation Remains Stubbornly High
- Total CPI inflation advanced by 2.8% over June of last year, well down from a 3.4% print in May and besting the expectation of forecasters (3.0%). This is the slowest pace of annual price growth since March 2021. On a month-over-month basis, the 0.1% (sa) gain in June is a slight uptick from May but remains below the 3-, 6-, and 12-month averages.
- Yet again, energy prices were a big contributor to the improvement in headline CPI inflation, falling 14.6% in June relative to the year-ago level. Gasoline prices were down 21.6% from a year ago, while fuel oil and natural gas prices also made healthy contributions. Notably, June will likely be the maximum drag from energy prices on a year-over-year basis, as crude values peaked in the same month last year.
- Food price growth remained steady in June, with year-over-year inflation of 8.3% broadly matching May’s advance. Grocery prices (9.1%) drove the increase, underpinned by double-digit, year-over-year gains in bakery products (12.9%), fresh fruit (10.4%), and other food preparations (10.2%). Offsetting this was a more modest advance in food purchased from restaurants (6.6%).
- Excluding food and energy, prices were 3.5% higher in June than they were a year earlier, inching down from 4.0% in May. This was the slowest pace of price growth since January 2022. The cost of cellular services was a meaningful part of the story, falling 14.7% over June of last year after posting another substantial drop in May. At -22.1% (y/y), the price of childcare services also continued to be a notable drag on core inflation. But it’s an open question as to the durability of these declines. In contrast, the stickier and weightier inflation measures for rented and owned accommodation remain elevated at 5.8% and 5.4%, respectively. While off their peaks, they have been grinding sideways in recent months as opposed to posted ongoing improvements.
- On a monthly basis, CPI excluding food and energy advanced by 0.1% in June (sa), matching May’s gain. That caused the three-month annualized rate to decelerate sharply to 2.5% in June from 3.3% the prior month.
- The Bank of Canada’s key measures of core CPI inflation – the trimmed mean and median – decelerated to 3.7% and 3.9%, respectively, in June from around 3.9% in May. Meanwhile, on a three-month, annualized basis—a better gauge of current price pressures—messages were more mixed in June, with the median remained unchanged at 3.6% and the trimmed mean accelerating slightly to 4.0% from 3.9% in May. At the same time, the core-services excluding shelter measure was also down just a tick in June to 4.8%, according to our calculations.
All told, there was a lot of good news in the June inflation print. Total CPI with and without energy and food slowed considerably on a year-over-year basis. However, a broad suite of core CPI measures point to more recent underlying inflation remaining stuck in the 3.5% to 5.0% range, suggesting we’re still a long way from the Bank of Canada’s 2% target. But as the Bank gave itself until mid-2025 to return inflation to 2% in its most recent Monetary Policy Report, the central bank doesn’t look to be in a rush. Given that the Bank even considered pausing at this month’s meeting, the better-than-expected inflation outcome reinforces our forecast for the overnight rate to be maintained at 5% for the remainder of the year.
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