Less worse than expected

You can't say you weren't warned -- and by Bank of Canada Governor Tiff Macklem, no less.  The Governor suggested last week, based no doubt on a heads-up from Statistics Canada, that headline inflation likely headed north of 8 percent in June, and might remain there for a few months before starting to slip lower.  

Sure enough, today's data from StatsCan showed that headline CPI rose 8.1 percent in the year to June, up from 7.7 percent in May, marking yet another four-decade high. This was actually a slightly better outcome than the market consensus, which had looked for an 8.4 percent increase.  That said, the month-on-month increase of 0.7 percent annualizes to an even higher rate than today's headline print, offering little grounds for optimism of any early improvement.

No prizes for guessing that the main culprits continue to be gasoline and food prices. Gasoline cost 55 percent more last month than it had in June 2021, while food prices stood 8.8 percent higher. Excluding gasoline, the annual rise in CPI was 6.5 percent; excluding both energy and food, it was 5.3 percent. While less scary than the headline, these figures are of course far above the Bank of Canada's 2 percent target. It might also be noted that seven of the eight components of the index tracked by StatsCan rose in June, the sole exception being clothing and footwear, so inflation pressures are undoubtedly broad-based. 

There are some positive signs to be found behind the headline. The month-on-month rise in food prices was only 0.1 percent, which may be explained mainly by seasonal factors. The three Bank of Canada measures of core inflation, which have been moving steadily higher for many months, were much better-behaved in June, although their mean value crept up to 5.0 percent for the first time. 

Looking ahead, the July data may look slightly more encouraging. Gasoline prices have been significantly lower all across the country so far in the month, while the availability of domestic produce should again translate into moderation in food prices.  The problem for policymakers is that the unexpected persistence of high inflation means that an elevated year-on-year headline CPI is effectively baked in for some months to come -- the so-called base effect. Even several months of low month-on-month prints will only gradually reduce the year-on-year headline numbers that inevitably attract the focus of the media.  

What this means is that going forward, the most useful indicator of the inflation outlook will be the month-to-month changes rather than the headline. The Bank of Canada will no doubt focus closely on this, as will your trusty blogger. Whether the media can be persuaded to look beyond the scary headline numbers is, alas, another story.