Canada CPI: in the target range, for now

Canada's headline CPI came in slightly lower than expected in June. Data from Statistics Canada show that prices rose 0.1 percent in the month, down from 0.4 percent in May. This lowered the year-on-year figure from May's 3.4 percent reading to 2.8 percent, the lowest since March 2021. While it has become something of a habit to talk of the Bank of Canada's 2 percent inflation target, the official target is actually a range of 1-3 percent, which has now been hit.  However, it is highly unlikely that the Bank will consider today's data as evidence that its job is done.

Base effects continued to be a big part of the story in June, probably for the last time: June 2022 represented the peak of the inflation spike so there are no more outsized numbers left to fall out of the index. Specifically it was the cost of energy that helped push the headline reading lower, with gasoline prices down 21.6 percent in June from a year ago.*  CPI excluding gasoline was 4.0 percent higher in June than a year ago.

Two key components of the index continue to be responsible for most of the upward pressure. Food prices actually ticked slightly higher on a year-on-year basis; food purchased for consumption at home rose 9.1 percent from 9.0 percent in May, while restaurant prices slowed marginally. However, the monthly increase in food prices was a more reassuring 0.1 percent.  Mortgage costs also continued to push overall CPI higher, rising 30.1 percent from a year ago; this is, of course, the component of inflation that is most directly in the Bank's control.

The most widely-quoted measure of core inflation, CPI ex food and energy, remains above the target range, standing at 3.5 percent in June. As for the Bank of Canada's preferred core inflation measures, all three edged lower in June, but their mean value remains above 4 percent, suggesting the Bank has more work to do.

Today's data may be as good as it gets for the Bank of Canada (and Canadian consumers) in the near term. The end of the downward pressure from the base effect makes it likely that further progress toward 2 percent will be slow -- which is clearly the Bank of Canada's view, given its recent forecast that that level will not be reached until 2025. Some analysts are suggesting headline CPI will tick back above 3 percent in the next couple of months. This may well be the case, even though underlying inflation pressures are evidently easing. For sure, there is no reason for the Bank to contemplate rate cuts any time soon. 

* Friendly advice: don't hold your breath waiting for the Conservatives to stop parroting the line that higher fuel prices, supposedly the result of carbon tax hikes, are the main factor pushing inflation higher.