Inflation’s Deceleration in June Could Usher In a July Rate Cut

Key insights

Headline inflation ticked down in June. Gasoline prices were nearly flat compared with the same month last year, which helped to moderate price growth. The CPI’s year-over-year deceleration was also aided by lower prices for telephone services, traveller accommodation, and furniture. The pace of price growth for goods decelerated to 0.3 per cent (y/y) from 1.0 per cent in May. Several familiar culprits remain key contributors to the persistence of higher inflation, however. Rent prices were 8.8 per cent higher (y/y), which was only a notch below their 8.9 per cent increase in May. The pace of price growth for services also accelerated to 4.8 per cent (y/y) in June compared to 4.6 per cent in the pervious month.

The Bank of Canada’s latest set of consumer and business surveys paints a mixed but optimistic picture for the inflation outlook. After remaining perched around five per cent for four quarters, consumers’ one-year-ahead inflation expectations took a step down in the Bank’s latest survey, in large part due to recent developments in food and gas prices. While the rate of price growth for food in stores picked up to 2.1 per cent (y/y) in June, this rate is much milder than consumers have been accustomed to over the last few years. This moderation seems to have reassured many Canadians. Though inflation expectations have fallen, however, they remain high—particularly for services.

June’s CPI report is the last major data release before the Bank of Canada’s next interest rate decision. Before the report, odds favoured a cut at July’s meeting. Beyond inflation expectations, the Bank’s focus in setting monetary policy revolves around the balance of supply and demand in the economy, wage growth, core inflation, and corporate pricing behaviour. On the demand side, consumers are still reducing their spending because of their expectations for interest rates and inflation and are generally pessimistic about the economic outlook. Price-setting practices are normalizing, as firms expect that price pressures will continue to ease as input costs taper and consumer demand falters. The Bank’s measures of core inflation have trended down with fits and starts but fell in June. Average hourly wage growth remains around five per cent, though pressures are dissipating. Labour shortages, which contributed to driving wages and inflation higher, have eased. In the Bank’s Business Outlook Survey, the share of firms reporting labour shortages as a top concern is near its lowest point, replaced by uncertainty over the economic outlook. There’s a lot of data for the Bank of Canada to parse but another rate cut isn’t out of the question next week.

For more details about our inflation forecast and inflation’s impact on the Canadian economy, please consult our Canadian Five-Year Outlook.