The June consumer price index (CPI) report marks the moment when Canada’s two-year inflation scare finally returned to the realm of normal. Inflation might still have some bases to cover to reach home plate, but at least it has re-entered the recognized ballpark.
Statistics Canada reported Tuesday that the inflation rate had fallen to 2.8 per cent in June, the slowest pace of year-over-year consumer price growth since March, 2021. As many economists quickly noted, that brought inflation inside the Bank of Canada’s target range of 1 per cent to 3 per cent – a territory we haven’t inhabited in 27 months. It was the longest stretch that inflation has been above the target range since the central bank adopted inflation targeting in 1991.
The battle isn’t won yet: The central bank has been adamant that it wants to return inflation to the midpoint of that range, 2 per cent, which is the formal target on which the bank’s interest-rate policy is grounded. As encouraging as the June figures looked, there is still plenty in them for the bank to worry about; it’s far from a given that we’ve reached the end of the bank’s inflation-fighting interest-rate increases.
Still, the Bank of Canada must surely – if quietly – take some solace in this return to the target range. Based on the bank’s formal mandate, this is the range within which the bank has flexibility to tolerate inflation a little below or (in this case) above the 2-per-cent target.
In short, at least on paper, inflation has exited the red zone in which higher interest rates are pretty much compulsory for our central bankers. We’re in familiar territory for the Bank of Canada, where it is well equipped to keep inflation under control – something that was absolutely in doubt a year ago, when the inflation rate surged above 8 per cent. It’s also territory where consumers, many of whom had never lived with that kind of inflation, may now also find some level of comfort with a more recognizable pace of prices.
But before we get too excited about this development, remember that in the most recent renewal of the central bank’s inflation-targeting mandate in late 2021, the bank pledged to use the flexibility of the target range “only to an extent that is consistent with keeping medium-term inflation expectations well anchored at 2 per cent.” The traumatic run-up of inflation for four-decade highs has shaken inflation expectations; that has unquestionably reduced the bank’s tolerance for continued above-target inflation as a result.
And this 2.8-per-cent inflation rate is carrying more baggage than most. A lot more. While the overall inflation picture has greatly improved, the details still contain plenty of significant price pressures to test the frayed nerves of consumers, and keep central bankers on their toes.
One piece of baggage that provides a mixed signal is that of mortgage interest costs. They have spiked 30 per cent over the past year, a consequence of the Bank of Canada’s own sharp interest-rate increases aimed at cooling inflation. If you exclude mortgage interest costs from the calculation, inflation in June was 2 per cent on the nose.
So, one could argue that at least numerically, the remaining inflation above the target is a creation of the central bank’s – and more a side effect of the solution than a part of the problem. But try telling that to a household dealing with soaring costs of keeping a roof over their head. For them, this is the most significant and visible component of the rising cost of living. It may not speak to underlying inflation pressures, but it most certainly affects inflation perceptions and expectations.
It’s also notable that despite the falling overall inflation rate, price pressures remain quite broad. Desjardins Capital Markets said that looking at 55 component groups of consumer products based on their weights in the CPI, 62 per cent of the index still exhibited inflation above the 3-per-cent upper boundary of the Bank of Canada’s target range in June, while 30 per cent were below the 1-per-cent bottom of the range. Both of those numbers have improved markedly in the past few months, but nevertheless, a very large swath of consumer goods and services is still exhibiting oversized price increases.
A key source for this is the persistence of food inflation. Food alone makes up about one-sixth of the CPI, and food inflation was still north of 8 per cent in June. Bakery prices were up 13 per cent year over year last month; fresh fruit prices were up more than 10 per cent. With groceries being a relatively high-frequency consumer purchase, these steep increases keep inflation highly visible for consumers and, again, continue to colour perceptions.
These perceptions serve to keep inflation expectations elevated, even as overall inflation retreats. And expectations will play a key role in the Bank of Canada’s ability to wring inflation from 2.8 per cent to 2 per cent, and stabilize it near that target over time.
This will be the last battleground in the Bank of Canada’s war on inflation. To win it, the details across the CPI will have to get more convincing.