Canada’s latest inflation numbers are coming in even lower than expected. Statistics Canada (Stat Can) data released this morning shows that annual growth for the Consumer Price Index (CPI) slowed in June. Higher rates are starting to throttle demand, but not nearly enough to slow the Bank of Canada (BoC) preferred measure of inflation.
Canadian Headline Inflation Slowed More Than Expected
Canadian headline inflation showed much lower growth than the consensus estimate. Following a 3.4% increase in May, annual growth came in at 2.8% in June. It was 0.2 points below estimates, and the lowest growth seen since March 2021. The slowdown was observed broadly according to Stat Can, but the impact of gasoline drove lower growth over the past year.
Headline CPI also showed 0.1 points in growth, following flat results in May. According to Stat Can, the pressure keeping monthly growth down was travel tours in June. Yes, you read that correctly.
The central bank’s target rate for annual CPI growth is 2 points, with a 1 point tolerance above and below. At the current rate, headline inflation is now within that range, sparking many to wonder if rate cuts are coming soon. The short answer is don’t expect a cut for the remainder of this year.
Bank of Canada’s Preferred Method of Inflation Remains Elevated
Headline inflation is falling, but the central bank preferred measures are still far from the target rate. Inflation contains volatile market components, which are prone to base effects—a skew produced by using a narrow comparison of a 12-month change. Instead, the Bank of Canada (BoC) prefers to use CPI-trim and CPI-median. The former trims the most extreme measures as noise, while the later is the change in the 50th percentile of prices.
Looking at the BoC’s preferred measures reveals a less-than-encouraging picture. The average 3-month growth rate for both CPI-trim and CPI-median climbed to 3.9% in June, warned RBC.
“The newly introduced “super core” (trim services prices ex-shelter) continues to run particularly hot, at an annualized 4.8% on a three-month basis in June and matching the pace in May,” explained Claire Fan, an RBC economist.
“Similarly, the breadth of inflation pressures has also been stalling at levels that are still much wider than pre-pandemic. In June, close to 60% of the basket was still seeing above 3% inflation on a three-month annualized basis, unchanged from late 2022.”
Domestic consumer demand is slowing with higher interest rates, but core measures have been “sticky.” The bank’s sentiment reflects comments made by the BoC earlier this month, justifying the latest interest rate hike.
“The BoC last week acknowledged that higher rates are already having an impact, just not to the extent as expected to-date,” notes Fan.
Adding, “The central bank is also clearly willing to hike interest rates further if necessary.”
RBC expects higher rates to put a dent in consumption in the second half of the year. It shouldn’t be enough to require rate cuts, especially with the consumer resilience demonstrated. However, they see the slowdown pushing the central bank to pause and hold this level for the remainder of the year.