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Inflation cools ahead of Bank of Canada rate decision
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Food and service prices are still a bit high
Published July 16, 2024 • Last updated 3 hours ago • 3 minute read
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June inflation data gave the Bank of Canada what it needed to cut interest rates at next week’s meeting, economists say. Photo by Postmedia
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Canada Annual inflation rate slowed to 2.7 percent in June from 2.9 percent the previous month, a slowdown that removes at least one obstacle to another potential Bank of Canada interest rate cut next week.
The month-over-month reduction in inflation was largely a result of gas prices, which rose just 0.4 percent year-over-year in June, compared with a 5.6 percent increase in May. Excluding gasoline, inflation would have slowed to 2.8 percent.
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Other components with slowing price growth in June included housing inflation, which rose to 6.2% year-on-year, down from 6.4% in May, and transportation, which slowed in June to 2% year-on-year, down from 3.5% in May.
On the other side of the equation, factors keeping pressure on prices included rent inflation, which remained high at 8.8% year-on-year, and mortgage interest costs, which rose 22.3%.
“Those are parts of the basket that I think we’re really seeing pressure that’s persisting,” said Dawn Desjardins, a senior economist at Deloitte. “I think it’s a demand story with a lack of supply, so that’s really keeping those elements hotter than expected.”
Durable goods prices fell 1.8% year-on-year, driven by the largest decline in passenger vehicle sales since February 2015. However, despite continued improvements in goods prices, services price growth remained elevated at 4.8% year-on-year in June, up from 4.6% in May.
Another sticking point was the cost of food purchased in stores, which rose 2.1 percent year-on-year in June, up from 1.5 percent in May. Over the past three years, the price of food purchased in stores has increased 21.9 percent, although overall inflation in this category has been on a downward trend since January 2023.
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Core inflation measures, the data the Bank of Canada prefers to look at when making monetary policy decisions, continued their downward trajectory.
The CPI-regular and CPI-median fell 0.1 percentage point year over year to 2.3% and 2.4%, respectively. The third key measure, the CPI-trim, remained unchanged at 2.9%.
However, the quarterly annual average of these measures rose to 2.9% in June from 2.5% in May, something economists say could signal that overall inflation could remain at the upper end of the central bank’s two to three percent target for longer.
“This (implies) that the annual pace of inflation is likely to remain at the upper end of the Bank of Canada’s 1 percent to 3 percent range in the coming months,” James Orlando, senior economist at Toronto-Dominion Bank, wrote in a note to clients. “This has been driven not only by housing prices but also by price gains in ‘nice-to-haves’ such as the cost of dining out, health care spending and household operations.”
During the central bank’s latest policy rate announcement on June 5, Bank of Canada Governor Tiff Macklem said the bank will make its policy decisions on a meeting-by-meeting basis. Since the last rate announcement, the unemployment rate has risen to 6.4 percent and business sentiment has continued to soften.
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Katherine Judge, a senior economist at the Canadian Imperial Bank of Commerce, believes the central bank should trust its forecasts and cut its rate again when it meets on July 24.
“The economy is clearly in need of interest rate relief to ensure a soft landing with future headwinds such as large mortgage rollovers and population growth likely to come crashing down,” Judge wrote in a note to clients. “With headline inflation back in target zone and the Business Outlook Survey showing that firms’ inflation expectations are easing, any concerns about upside risks to inflation or inflation stagnating above target are missing the mark.”
• Email: jgowling@postmedia.com
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