Yahoo Finance Canada's inflation slows slightly more than expected in June, raising odds of BoC rate cut next week
Annual rate for CPI was 2.7 per cent, Statistics Canada says
Canada's annual inflation rate cooled more than expected in June to 2.7 per cent, Statistics Canada data showed on Tuesday, increasing the likelihood of another Bank of Canada (BoC) interest rate cut on July 24.
Financial experts largely say the latest consumer price index (CPI) data solidifies the case for a rate cut next week, while money markets raised the odds of a cut to almost 93 per cent from 82 per cent before the data was released, according to Reuters.
The latest CPI data "gave the Bank of Canada what it needed in order to cut interest rates at next week's meeting," CIBC economist Katherine Judge wrote in a note Tuesday morning. The Bank of Montreal, which had previously projected the next BoC rate cut to take place in September, now expects it to happen next week, said rates and macro strategist Benjamin Reitzes.
Analysts polled by Reuters ahead of the announcement had expected inflation to drop to 2.8 per cent from 2.9 per cent in May. Measures of core inflation that the BoC puts under the microscope also improved slightly, with CPI-median and CPI-trim both increasing from May by a seasonally-adjusted 0.2 per cent, down from 0.3 per cent.
The range of positive core inflation data show "that the prior month's upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure," Judge wrote.
National Bank economists Mathieu Arseneau and Alexandra Ducharme wrote in a note that the latest data support their contention that "Canada's widespread inflation problem has long been solved and is limited to the shelter component."
When mortgage interest costs, "whose rise is largely attributable to the Bank of Canada itself," is removed from the CPI basket, they write, "annual inflation is only 1.9 per cent." The mortgage interest component of the June CPI data was up 22.3 per cent from a year earlier, fuelled by homeowners renewing mortgages at rates far higher than those before and during the pandemic.
'A mixed bag'
Still, some experts pointed to components of the data in the report that remain sticky.
TD Bank senior economist James Orlando wrote in a research note that the latest data "has increased odds of back-to-back rate cuts," but he declared the overall report "a mixed bag."
The three-month annualized pace of core inflation has gone up three months in a row, Orlando wrote, with prices rising for "nice-to-haves" like dining out, healthcare and household operations. "This infers that the annual pace of inflation should remain in the upper end of the BoC's 1 per cent to 3 per cent range over the coming months," he wrote.
That "acceleration in underlying price pressures found below the headline numbers" offers a case for waiting until September to cut interest rates, Corpay chief market strategist Karl Schamotta wrote in a note. However, he added, "the economy remains weak, inflation expectations have fallen dramatically, and Bank officials appear to be operating with a dovish bias."
Signs of a softer economy
The BoC reduced its overnight rate by 25 basis points to 4.75 per cent on June 5, making it the first G7 nation to cut interest rates since 2020. At the time, the central bank said further cuts would depend on core inflation, the balance between supply and demand in the economy, inflation expectations, wage growth and corporate pricing behaviour.
Since then, various indicators have showed a softening economy and labour market, ballooning market odds of a July cut from 35 per cent after the June announcement to nearly 93 per cent following Tuesday's CPI data.
BoC surveys on business and consumer sentiment released Monday were widely viewed as further evidence that inflation will continue to cool in the months ahead. The Bank's Business Outlook Survey suggests that "most industries are currently overstaffed," wrote NBC's Arseneau and Ducharme. "In fact, the proportion of firms reporting labour shortages fell to 15 per cent, a level seen only in previous recessions."
On the wage front, the survey showed "a large majority of companies are planning to give smaller pay rises than last year, which will help to bring down inflation excluding housing," they wrote.
Gasoline down, but food prices up
Statistics Canada said slowdown in the Consumer Price Index (CPI) was mainly driven by slower year-over-year growth in gasoline prices (up 0.4 per cent), as well as lower prices for durable goods (down 1.8 per cent), with the cost of used cars dropping 4.5 per cent. Prices for food purchased from stores, however, went up 2.1 per cent in June.
On a monthly basis, CPI decreased 0.1 per cent in June. Seasonally adjusted, CPI rose 0.1 per cent.
The June CPI numbers follow May figures that jumped unexpectedly to 2.9 per cent from 2.7 per cent in April, driven largely by price increases for cellular services, travel tours, rent and air transportation.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf. Download the Yahoo Finance app, available for Apple and Android.
