June 2024 CPI: Encouraging progress but a back-to-back move by the Bank still at odds

I’m not too excited about today’s release, despite growing evidence that the Bank is likely to cut rates next week. We believe they’ll adopt a more cautious approach. Business inflation expectations have fallen within the Bank’s target range, indicating slower and more muted price changes. June’s deceleration was primarily driven by lower transportation costs and subdued energy prices. However, accelerating services inflation poses significant risk to inflation progress. With solid economic growth in the background, waiting until September seems prudent.

Andrew DiCapua, Senior Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

• Canada’s headline CPI inflation decelerated to 2.7% in June, in line with consensus (2.7%) on a year-over-year basis. Despite progress from May, inflation grew similar to April on an annual basis. Monthly seasonally adjusted prices grew a mere 0.1% as prices for travel tours and gasoline decelerated.
• The Bank of Canada’s core measures (Trim and Median) grew 2.8% year-over-year, consistent with May, marking the fourth consecutive month within the target range. Short-run core measures (3-month change annualized) increased to 2.9%, its strongest reading since January.

CPI Components

• Energy prices rose annually at a slower pace (+0.5%) compared to May (+4.1%) dragging down headline inflation. Excluding energy, June inflation rose 2.8%.
• Shelter prices decelerated to 6.2%, with rent prices growing 8.8% annually, barely showing progress from May (+8.9%).
• Goods inflation remains subdued, growing 0.3%, driven down by durable and semi-durable goods. This trend is likely to continue with monthly changes also showing negative growth. Services inflation continues to be stubbornly sticky and reaccelerated to 4.8%. Wage growth reported in the Labour Force Survey (LFS) reaccelerated in June to 5.4% and is likely to keep services inflation higher in the context of a still loosening labour market.
• Food price inflation rose again in June, growing 2.8%. Grocery prices rose 0.8% on a monthly basis, likely due to seasonal price changes. Despite significant progress on food inflation, this momentum is showing a possible upward swing in prices. Restaurant food prices grew 4.3%, holding steady around 4% over the past few months.

Provincial and regional inflation

• Inflation decelerated in six provinces with Quebec down nearly 1% annually.

SENTIMENT, OUTLOOK AND IMPLICATIONS

• June CPI was better than the inflation forecast in the Bank of Canada’s April Monetary Policy Report, which expected 3% year-over-year growth. The Bank’s Business Outlook Survey released on Monday showed moderating inflation expectations within the target range (1 to 3 percent), and an indication that businesses expect less frequent and muted price changes. With the labour market coming into balance, inflation within range, and recent business surveys showing progress on inflation expectations, the Bank is in a good position. There’s more progress to achieve, especially with wage growth above 5% and services inflation reaccelerating. Despite the fact that Governing Council has leeway to lower the policy rate next week, we still believe that they will take a cautious approach and manage market expectations for further cuts this year.
• Markets have almost solidified expectations of a rate cut in July with the probably increasing from 36% before the announcement to 90%. The strength of the Canadian economy this year including upward revisions to the second quarter provides some risk to the degree of excess supply. With the release of the July Monetary Policy Report alongside next week’s rate decision, the Bank will provide updated guidance on progress and expectations. They have ample evidence to move rates lower at their next meeting, but it’s not a sure thing.

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