Inflation falls below 3%, but core measures still proving “sticky”

Canada’s headline inflation reading took another step towards the magic 2% figure by slowing to an annual rate of 2.8% in June.

That’s the slowest annual pace since March 2021, and below market expectations for a reading of 3%. Statistics Canada reported that on a monthly basis, headline inflation advanced 0.1% in June following a 0.4% reading in May.

Source: Statistics Canada

Core inflation, which strips out more volatile items like food and energy, also continued to slow in June, albeit at a slower pace.

The Bank of Canada’s preferred measure of core inflation, CPI-median and CPI-trim, ticked down to 3.9% and 3.7%, respectively. On a three-month annualized basis, however, the Median remained steady at 3.6% and Trim accelerated to 4%.

“The June CPI report had a little something for everyone, with the headline rate slowing more than expected, but the BoC’s core metrics remaining sticky,” wrote BMO’s Benjamin Reitzes.

Mortgage interest costs remain inflationary

Mortgage interest costs continued to rise for Canadians in June, driven by the Bank of Canada’s continued monetary policy tightening.

The mortgage interest cost index, a sub-component of the overall inflation measurements, rose at an annual pace of 30.1% in June, up from 29.9% in May. Excluding higher mortgage costs, inflation would have been 2% in June, Statistics Canada said.

While this per capita index is up over 30% year-over-year, actual mortgage interest costs in dollar terms as of the first quarter have risen nearly 70% over the past year, data released recently from Statistics Canada show.

Source: Statistics Canada

Another BoC rate hike remains on the table

Given that base effects are currently contributing to the easing, some suggest headline inflation could tick back up in the coming months as those base effects start to wear off.

“Inflation will likely creep back above 3% in the coming months, as base effects from lower gasoline prices become less generous,” noted CIBC’s Andrew Grantham.

“However, it was the stickiness of core inflation measures which was a concern for the Bank of Canada, and with CPI-trim and median showing little further progress towards the target band there remains a very real risk that interest rates could be raised again after the summer,” he continued.

Others, however, believe the Bank will be willing to stick to the sidelines for now to observe forthcoming data between now and its September 6 monetary policy meeting.

“We continue to expect the full impact of rate hikes to date to come through gradually, slow spending over the second half of this year and for that to push the central bank back on the sidelines with no additional interest rate hikes this year,” noted Claire Fan of RBC Economics.

Desjardins’ Randall Bartlett agreed, adding that the Bank has given until mid-2025 for inflation to ease back to target.

“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,” he noted.

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