getting back on track

With the latest release of Consumer Price Index (CPI) data from Statistics Canada, the overall rate of inflation resumed its downward trajectory in June. After a (somewhat surprising) increase in the headline rate in May, to 2.9%, inflation declined last month to 2.7%. That marks six consecutive months that the overall rate of inflation has been within the Bank of Canada’s target range of 1-3%.

The biggest contributor to the overall decline in the headline rate last month was gasoline. Prices at the pump fell by 3.1% nationally between May and June, which helped bring the year-over-year price increase for retail gas down to just 0.4% (from 5.6%). Additionally, price pressures continue to broadly ease across the rest of the CPI. In fact, food was the only one of the major components of the CPI that saw an increase in its inflation rate last month, to 2.8%—still below the upper end of the Bank’s target range for overall inflation.

Notably, the only CPI components whose year-over-year price increases are currently in excess of 3% are shelter (for which inflation has begun to ease, though mortgage interest cost and rent increases continue to exert upward pressure) at 6.2%, and alcohol, tobacco, and cannabis at 3.2%. All other components, along with all three measures of core inflation (CPI Trim, CPI Median, and CPI Common) sit below the upper end of the Bank’s range.

The June CPI data reinforce our thesis that the Bank of Canada no longer needs to continue with its restrictive monetary policy regime—indeed, the rate of inflation for absolutely everything except mortgage interest sits at a very modest 1.9%. Additionally, the unemployment rate continues to rise as wage growth slows, job vacancies are decreasing, and per-capita retail spending is declining along with per-capita GDP. With all of that in mind, our expectation is that the Bank of Canada will cut its policy rate again on July 24th, to 4.50%.