Canadian Inflation Falls Within Bank of Canada’s Target Range; Food and Shelter Costs Remain High
June inflation data released today by Statistics Canada showed that the Consumer Price Index (CPI) rose 2.8% year-over-year (y/y), slightly below expectations. This was the lowest CPI reading since February 2022.

The decline in inflation was mainly due to lower energy prices, which fell by 21.6% y/y. Without this decline, headline CPI inflation would have been 4.0%. The year-over-year decrease resulted from elevated prices in June 2022 amid higher global demand for crude oil as China, the largest importer of crude oil, eased some COVID-19 public health restrictions. In June 2023, consumers paid 1.9% more at the pump compared with May.

Food and shelter costs remained the two most significant contributors to inflation, rising by 9.1% y/y and 4.8% y/y, respectively. Food prices at stores have risen nearly 20% in the past two years, the most significant rise in over 40 years. Shelter inflation rose slightly from 4.7% y/y in May.

The largest contributors within the food component were meat (+6.9%), bakery products (+12.9%), dairy products (+7.4%) and other food preparations (+10.2%). Fresh fruit prices grew at a faster pace year over year in June (+10.4%) than in May (+5.7%), driven, in part, by a 30.0% month-over-month increase in the price of grapes.

Food purchased from restaurants continued to contribute to the headline CPI increase, albeit at a slower year-over-year pace in June (+6.6%) than in May (+6.8%).

Services inflation cooled to 4.2% y/y from 4.8% y/y in May. This was due to smaller increases in travel tours and cellular services.

The Bank of Canada’s target range for inflation is 1% to 3%. While June’s inflation reading was within the target range, it is still higher than the Bank would like. The Bank raised the overnight policy rate twice in the past two months to reduce the stickier elements of inflation.

There were signs of easing price pressures for consumer goods also. Durable goods inflation continued to cool to 0.8% y/y in June. Passenger vehicle prices rose slower in June (+2.4%) than in May (+3.2%). The year-over-year slowdown resulted from a base-year effect, with a 1.5% month-over-month increase in June 2022 replaced with a more minor 0.6% month-over-month increase in June 2023. This coincided with improved supply chains and inventories compared with a year ago. Household furniture and equipment was up only 0.1% y/y in June, down from a peak of 10.5% last June.

The June inflation data provides some relief to consumers, but it is clear that food and shelter costs remain a major concern. The Bank of Canada will closely monitor inflation in the coming months to see if it is on track to return to its 2% target. There is another CPI report before the Bank meets again on September 6th.

The Bank of Canada’s underlying inflation measures cooled further in May. CPI-trim eased to 3.7%y/y in June from 3.8% y/y in May, and CPI-median registered 3.9% versus 4.0% y/y in May. The chart below shows the closely watched measure of underlying price pressures, the three-month moving average annualized of the core measures of CPI. They continue to be just under 4%.

Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation benefits from sizeable base effects due to the favourable comparison to high energy prices last June. The Bank of Canada (BoC) is watching its preferred core measures, which continue to show glacial progress.

Bottom Line

It takes time for the full effect of interest rate hikes to feed into the CPI. Mortgage interest costs will continue to rise as higher interest rates flow gradually through to household mortgage payments with a lag as contracts are renewed.

BoC Governor Macklem emphasized last week that the Bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.

The BoC is facing a difficult balancing act. It needs to raise interest rates enough to bring inflation under control, but it also needs to be careful not to raise rates so high that it causes a recession. The next few months will be critical for the BoC as it assesses the risks of inflation and recession.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@dominionlending.ca

Canada’s inflation rate falls to 2.8%

Gasoline pulling rate down, while food and mortgages pushing it up

Pete Evans · CBC News · Posted: Jul 18, 2023 5:40 AM PDT | Last Updated: 5 minutes ago
The silhouette of a man pumping gas is shown.
Gasoline prices were the biggest factor pulling down the inflation rate in the year up to June. If they are stripped out of the numbers, the inflation rate would have been four per cent. (David Paul Morris/Bloomberg)

Canada’s inflation rate fell to 2.8 per cent in June, its lowest level in more than two years.

Statistics Canada said a sharp decline in the price of gasoline compared with this time last year was the biggest reason for the drop, which brought Canada’s official inflation rate down to its lowest point since March 2021.

Gasoline prices were 21 per cent lower during the month than they were the same month a year earlier.

Another factor pushing down the increase in the cost of living was telecommunications services, which fell by 14.7 per cent compared with what they were a year ago.

“This was a result of both lower prices for cellular data plans and promotional pricing,” Statistics Canada said.

Prices for internet access fall
Rogers finalized its purchase of rival Shaw in April, and at least in the short term, the result has been a flurry of promotional offers between the telecom giants.

The data agency noted that prices for internet access fell by 3.2 per cent in the past year and by five per cent in the month of June alone — the biggest one-month plunge since 2019.

“This was mostly due to promotions in Ontario and lower prices in Quebec,” Statistics Canada said.

On the other side of the ledger, food and mortgage costs were the biggest single factors pushing the rate higher. The cost of food continues to increase at a pace of more than nine per cent. Coming on the heels of the annual increase up to June of last year, that means the price of food has gone up by almost 20 per cent in two years. That’s the fastest pace of increase in the price to fill up a grocery cart in more than 40 years.

Claire Fan, an economist at the Royal Bank of Canada, says despite remaining stubbornly high, there’s reason to hope that food prices will soon come down because most of the global factors that caused them to spike in the first place are dissipating.

Protrait of economists Claire Fan
Royal Bank economist Claire Fan says there are plenty of reasons to expect increases in food prices to start slowing soon. (Craig Chivers/CBC)
“It’s taking a bit longer for those domestically added pressure to food prices to come down, but they have come down and they will continue to,” Fan told CBC News in an interview.

And mortgage interest costs are also making things a lot more expensive, up by more than 30 per cent in the past year. Mortgage rates have skyrocketed as a direct result of the Bank of Canada’s campaign to tame inflation, but there’s little relief for renters, either.

Statistics Canada says rent has increased by 5.8 per cent in the past year, which is the second-biggest single contributor to the higher inflation rate in the past year, behind mortgage costs.

Calgarian Stephanie Haynes has had to deal with an increase more than five times that amount, with her landlord telling her recently that the rent on her two-bedroom apartment would increase by more than $400 a month from the $1,550 she was paying previously.

Profile of Calgarian renter Stephanie Haynes
Calgarian Stephanie Haynes says her rent has gone up by more than 30 per cent this year. (Anis Heydari/CBC)
“I actually didn’t believe it when I first got it,” she told CBC News. “I had to read it three times to make sure … what I was reading — I actually was in shock.”

Haynes said she spent months trying to find alternatives but was shocked to discover prices were the same everywhere she looked. So she’s been left with no alternative but to pay it — and then try to cut her expenses where she can.

“I have enough money to survive, but not enough money to thrive,” she said. “I have to look at all of my bills that are coming out and budget accordingly.”

The fresh inflation data comes just days after the Bank of Canada decided to hike its benchmark interest rate, for the 10th time in little more than a year, as part of its campaign to wrestle inflation into submission.

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The bank justified its decision by saying more tightening was needed to get inflation back to its two per cent target. The inflation rate peaked last June at 8.1 per cent and was 3.4 per cent last month.

While it’s an encouraging sign to see the official inflation number dip back into the range of between one and three per cent that the Bank of Canada targets, there’s ample reason to think it may be a lot harder to get inflation to go lower from here.

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If gasoline is stripped out of the data, the headline inflation rate would have been four per cent. If food is stripped out, the inflation rate would have been 1.7 per cent. If mortgage costs aren’t counted, the rate would have been two per cent.

Those are great examples of why the central bank pays less attention to the headline number — because it is easily skewed by individual items that can be volatile — and pays more attention to so-called core inflation, which smooths out the noise. Of the three core inflation measures the bank tabulates, all declined, but one is still above five per cent, while the other two are barely below four per cent.

Royce Mendes, an economist with Desjardins, says it’s too early to think that the official rate will simply slide back down to target by itself, since the drop in June was based on one-time items that probably can’t be repeated.

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“The latest moves have been predicated on sharp declines in cellphone services prices, which doesn’t provide any assurance that this deceleration can be maintained,” he said. Mendes said he thinks inflation could heat up again in the coming months once the “one-off” price drops for things like gasoline and cellular services are gone.

Andrew Grantham, senior economist with CIBC, says he wouldn’t be surprised to see the official inflation rate inch higher in the coming months, once the year-ago comparisons become less favourable.

“Headline inflation will likely creep back further above three per cent in the coming months, as base effects from lower gasoline prices become less generous,” he said.

ABOUT THE AUTHOR

Pete Evans
Senior Business Writer

Pete Evans is the senior business writer for CBCNews.ca. Prior to coming to the CBC, his work has appeared in the Globe & Mail, the Financial Post, the Toronto Star, and Canadian Business Magazine. Twitter: @p_evans Email: pete.evans@cbc.ca