Canada’s inflation rate fell by more than expected in June, boosting the likelihood that the Bank of Canada will cut interest rates again next week.
The Consumer Price Index rose by an annual 2.7 per cent in June, down from 2.9 per cent in May, Statistics Canada said Tuesday. Financial analysts were expecting a slight easing to 2.8 per cent. Unadjusted for seasonality, consumer prices fell 0.1 per cent on a month-to-month basis – the first decline in six months.
While the previous CPI report in May was surprisingly strong, inflation has mostly been weak this year, relative to expectations on Bay Street and the Bank of Canada’s projections. Moreover, the annual inflation rate has been within the central bank’s target range of 1 per cent to 3 per cent for six consecutive months.
Because of the progress it was seeing in taming inflation, the Bank of Canada trimmed its benchmark lending rate in early June to 4.75 per cent from 5 per cent – the first cut in four years. The central bank is taking a data-dependent approach to its decisions, meaning the timeline for additional rate cuts is uncertain.
Even so, the data point to a sluggish economy that is struggling to cope with higher interest rates. The unemployment rate has risen to 6.4 per cent from a historic low of 4.8 per cent two years ago, and households are pulling back on discretionary purchases.
After Tuesday’s report, many economists and investors reinforced their calls for a second consecutive rate cut.
“A return to tepid consumer price growth likely seals the deal,” Royce Mendes, head of macro strategy at Desjardins Securities, said in a client note. “Along with significant declines in inflation expectations and a further normalization in corporate pricing behaviour, the latest inflation data build a strong case for continuing the rate cutting cycle without delay.”
Interest-rate swaps, which capture market expectations of monetary policy, are pricing in a 90-per-cent chance that the Bank of Canada lowers its policy rate by a quarter-point next week, according to Bloomberg data as of Tuesday morning. A day earlier, those odds were roughly 80 per cent.
The June CPI report showed fading price pressures on several fronts. Gasoline prices fell 3.1 per cent on a month-to-month basis, while those for travel tours dropped 11.1 per cent.
However, grocery price increases have accelerated for two consecutive months, climbing at an annual pace of 2.1 per cent in June after rising 1.5 per cent in May. While those figures are a far cry from the worst increases of the past two years – grocery prices were rising by roughly 11 per cent on an annual basis in late 2022 and early 2023 – it’s still a concerning development for inflation-weary consumers.
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As consumers spend less on non-essential products, it’s having a big impact on durable goods, which have fallen 1.8 per cent in price over the past year. Furniture and household appliance prices have dropped by 3.9 per cent and 2.1 per cent, respectively, declines that are also tied to a slumping real estate market.
Rents remain a significant financial challenge for many households, with those costs rising 8.8 per cent, year over year. Over all, shelter costs increased by 6.2 per cent in June, easing from 6.4 per cent in May.
Various core measures of inflation – which strip out volatile movements in the CPI – slowed last month. The Bank of Canada’s preferred core measures rose at an average annual rate of 2.75 per cent in June, easing from 2.8 per cent in May.
The CPI report is the last set of major economic numbers before the Bank of Canada decision. At the June announcement, BoC Governor Tiff Macklem said that “if inflation continues to ease, and our confidence that inflation is headed sustainably to the 2-per-cent target continues to increase, it is reasonable to expect further cuts to our policy interest rate.”
Rate cuts would bring relief to some consumers and companies, who expressed a dour outlook for the economy in a pair of surveys that the central bank published on Monday.
“Recent data have supported a cut, with the job market loosening and wage gains decelerating from elevated levels,” Toronto-Dominion Bank senior economist James Orlando said in a client note.
“From our view, the story hasn’t changed,” he continued. “The BoC is in a cutting cycle. Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next.”