Jul
Canada Inflation Slows again, providing the Bank of Canada with an opportunity to reduce interest rates next week. The consumer price index (CPI) increased by 2.7% in June compared to the previous year, down from 2.9% in May, according to a report from Statistics Canada released on Tuesday in Ottawa. This figure aligned with the median estimate from a Bloomberg survey of economists.
Consistent Target Range
This marks the sixth consecutive month that Canada’s headline annual inflation rate has remained within the central bank’s target range. The yearly rate of price increases has now reached its lowest levels since early 2021. On a monthly basis, the index decreased by 0.1%, against an anticipated rise of 0.1%, and grew by 0.2% when seasonally adjusted.
Tuesday’s data likely provides the Bank of Canada with confidence that the May spike in price pressures was temporary, suggesting that annual inflation is on course to meet the central bank’s 2% target sometime next year. Economists suggest this paves the way for officials to lower the policy rate to 4.50% next week. “Overall, there is nothing in today’s report that should be concerning for the Bank of Canada,” stated Charles St-Arnaud, chief economist at Alberta Central. “Whether they cut or not may just be a matter of adopting a more cautious approach.”
Market Reactions
Following the report, the Canadian dollar weakened, trading at C$1.3698 per US dollar as of 11 a.m. Ottawa time. This occurred concurrently with the release of retail sales data in the US. Canada bonds rallied, and yields on 10-year government of Canada notes fell by 4.8 basis points. Traders in overnight swaps increased their expectations of a rate cut by the Bank of Canada next Wednesday, with odds rising to about 90% from 80% before the release.
Persistent Price Pressures
Nonetheless, the report indicated some persistent underlying price pressures. The three-month moving average of core measures increased to an annualized rate of 2.91% from 2.52% in May, according to Bloomberg calculations. Combined with high service inflation, this momentum may prompt concerns about the central bank needing to decelerate the pace of rate cuts later this year.
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Core Inflation Measures
The average of the central bank’s two core inflation measures slowed on an annual basis, averaging 2.75% in June compared to 2.80% the previous month, aligning with economists’ expectations. Canada inflation slows. Following the release, the Bank of Montreal advanced its prediction for a rate cut to next week from September.
Expert Insights
Benjamin Reitzes, rates and macro strategist at BMO, noted, “All in all, the combination of Monday’s weak business outlook survey. The ongoing rise in the unemployment rate, and the steady progress in CPI — even if gradual — suggests the Bank of Canada will reduce rates by another 25 basis points at next week’s policy meeting.” June’s inflation figure is the second of two reports. It serves as the last significant economic data release before the next rate decision on July 24.
Previous Rate Cuts
Governor Tiff Macklem and his officials reduced the benchmark overnight rate by 25 basis points in June. They expressed increased confidence that inflation was moving towards the 2% target after observing several months of cooling price pressures. However, May’s inflation report, released shortly after the rate cut, showed unexpected acceleration in price gains. On Monday, the bank’s surveys revealed subdued business and consumer expectations for inflation. Firms anticipated slower growth in input and selling prices. The proportion of businesses reporting labor shortages is also at a record low, and their expectations for wage increases over the next year have diminished.
During their discussions for the June 5 decision, officials debated whether to wait until July to cut interest rates. This was to confirm that inflation was still on track to meet the target, indicating some uncertainty about the path to price stability. Macklem has repeatedly stated since the June rate cut that further policy reductions are plausible. He emphasized this would be if price pressures continue to ease. However, policymakers are cautious about lowering rates “too quickly” and risking progress on inflation.
Sector-Specific Insights
In June, Canada inflation slows as mortgage interest costs and rent remained the largest contributors to the annual inflation rate, rising by 22% and 8.8%, respectively. Excluding shelter costs, the consumer price index increased by 1.3% from a year ago, down from 1.5% in May. Excluding food and energy, the index rose by 2.9% from a year ago, matching the previous month. Services inflation climbed to 4.8%, up from 4.6% in May. Food prices rose by 2.8% year-on-year, while durable goods prices decreased by 1.8%.
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