That's a relief

There were likely a few sighs of relief at the Bank of Canada this morning, as Statistics Canada released June CPI data that showed an apparent easing in underlying inflation pressures. On a seasonally adjusted basis, headline CPI rose just 0.1 percent in the month, with the year-on-year rate falling to 3.1 percent from May's 3.6 percent increase.

Base effects relating to the impact of the pandemic last year continue to cause gyrations in the data, making it hard to interpret the data with any certainty. Two examples from today's report: beef prices were down about 11 percent year-on-year because in June 2020, many processing plants were closed because of the pandemic, whereas chicken prices are about 11 percent higher now after being weak a year ago. 

A further factor complicating the data is the movement in energy prices, particularly for gasoline. The overall energy price sub-index is up 19 percent from a year ago, with gasoline a full 32 percent higher. However, in a sign that the base effects are starting to unwind, the year-on-year increase for gasoline is actually down from the 43 percent rise reported in May.  

StatsCan's report offers some insight into the impact of the well-publicized problems that have arisen in global supply chains as a result of the pandemic. Mere months ago, the main focus here was lumber, but all recent evidence suggests that skyrocketing prices brought about by shortages have choked off demand, with the result that lumber prices have fallen back.  StatsCan's current focus is on the shortage of semiconductors -- likely attributable to Bitcoin mining as much as to the pandemic -- which has driven up the price of various categories of consumer durables, including vehicles and household appliances, up 4.1 percent and 5.2 percent respectively from a year ago. 

Today's headline data appear to support the Bank of Canada's view that the modest spike in inflation is likely to be temporary. However, the Bank will want to keep a close eye on its three preferred measures of core inflation. The average of these measures showed a year-on-year rise of just under 2.3 percent in June, the same as in May, so still above the Bank's 2 percent target. It will take a few more months of cleaner data, as economic conditions continue to normalize, before the Bank can be completely sure of the underlying inflation trend.