Fresh inflation figures showing price pressures rebounded lower last month are boosting odds among economists and market watchers that the Bank of Canada will deliver another interest rate cut next week.
Statistics Canada’s consumer price index (CPI) reported an annual inflation rate of 2.7 per cent in June. That follows a surprise uptick to 2.9 per cent in May.
Relief in gasoline prices was cited as the main reason for the annual decline. Gas prices were down 3.1 per cent month-to-month, the second consecutive month of lower prices at the pump.
Prices for travel tours were also down 11.1 per cent on a monthly basis, while cellular service costs fell 12.8 per cent annually.
Many durable goods saw outright price declines in the annual CPI, StatCan noted.
Passenger vehicle prices were down 0.4 per cent year-over-year, marking the largest annual decline since February 2015. Used vehicles in particular drove the cooling in this segment, with improved inventory levels driving down prices 4.5 per cent year-over-year following a rapid run-up during the COVID-19 pandemic.
Easing supply chains also helped the price of furniture fall 3.9 per cent annually in June, StatCan said. The agency also pointed to higher interest rates reining in consumer spending, with dwindling demand potentially driving prices lower.
But the pace of price hikes at the grocery store picked up for the second month in a row, rising 2.1 per cent year-over-year. On a three-year basis, grocery prices are up 21.9 per cent.
Price hikes were accelerating on a yearly basis for dairy products (up 2.0 per cent), fresh vegetables (up 3.8 per cent) and non-alcoholic beverages (up 5.6 per cent), as well as preserved fruit and fruit preparations (up 9.5 per cent). Shoppers looking to save money on fruit might’ve gone to the fresh section, however, where prices were down 5.2 per cent annually.
Dawn Desjardins, chief economist at Deloitte Canada, tells Global News that while food inflation might flare up from time to time, the pace of the past few months is nothing like the double-digit price hikes seen during the peaks in recent years.
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“We do expect to see some blips. This has been a modest acceleration, but still running well below where we were in the very worst of our inflation uptick,” she says.
Shelter prices were also up 6.2 per cent year-over-year, marking a step down from 6.4 per cent in the month before. Rents and mortgage interest costs are continuing to put the heat on household finances, Desjardins says, despite some cooling in StatCan’s mortgage index and easing in home prices.
“But on balance, the shelter part of Canada’s CPI basket continues to run very hot and it is obviously a big strain for consumers,” she says.
Odds rise for Bank of Canada cut
The Bank of Canada will be closely scrutinizing June inflation figures as the central bank prepares for its next interest rate decision on July 24. The central bank cut its benchmark interest rate to 4.75 per cent last month, the first reduction in more than four years.
Bank of Canada governor Tiff Macklem has said it’s “reasonable” to expect further interest rate cuts as long as inflation continues to cool according to the central bank’s forecasts.
Economists who spoke to Global News ahead of Tuesday’s inflation release said that with signs of easing in the labour market and expectations from businesses that sales will be rough in the months ahead, the June price figures would have the final say on whether the Bank of Canada delivers back-to-back rate cuts.
Katherine Judge, director of economics at CIBC, said in a note to clients Tuesday that the June CPI print indeed sets the central bank up for another cut. The Bank of Canada’s closely watched measures of core inflation showed signs of easing on a monthly basis, she noted, which can help monetary policymakers look through the inflationary uptick in May.
“This shows that the prior month’s upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure, paving the way for a (Bank of Canada) cut next week,” she wrote.
Financial markets on Tuesday advanced their bets for a rate cut at the central bank’s July 24 rate announcement to 88 per cent from 82 per cent previously, according to Reuters.
Heading into the week, Desjardins says that Deloitte Canada didn’t have a rate cut in July as part of its “baseline” forecast. But she says the pair of releases this week — a soft business outlook survey from the Bank of Canada itself and Tuesday’s June CPI report — tilt the odds towards another rate cut next week.
She adds that the Bank of Canada may still decide to hold next week as it waits for more signs that the path to its two per cent inflation target is not at risk.
Desjardins explains that the Bank of Canada will want to be cautious as it weighs how quickly to lower its benchmark interest rate, wanting to avoid unnecessarily “juicing” any part of the economy that could “jeopardize” inflation progress made to date. The housing market in particular is sensitive to interest rate movements, she notes, but June home sales data showed a limited response to the first rate cut last month from sidelined homebuyers.
The June inflation report is the latest puzzle piece in the picture of Canada’s slowing economy, explains RBC economist Claire Fan. A weakening labour market and signs of sluggishness elsewhere in the economy should be telling the Bank of Canada that its policy rate is restrictive enough to keep cooling inflation, she tells Global News.
“I don’t think there’s any question in terms of how weak the Canadian economy has been,” she says. “It’s very clear that inflation pressures are still easing.”
That broader context gives the Bank of Canada “more room to ease the monetary policy brakes,” she says.
Fan expects a 25-basis-point interest rate cut at every meeting going forward this year, though she cautions that Macklem and his peers are serious when they say they’re taking decisions meeting-by-meeting. Signs that those lingering risks to inflation, such as a hotter-than-expected housing market this fall, are materializing could lead the central bank to pivot back to a rate hold at any given point, she says.
James Orlando, senior economist at TD Bank, agreed in a note that recent data releases point towards a cut. But he also said that services inflation was continuing to drive the CPI basket higher as consumers keep spending on “nice-to-haves” like dining out, and that some three-month trends in core inflation remain elevated.
Beyond parsing the monthly figures for signs of a rate cut next week or next month, Orlando said the economic tea leaves are still pointing to lower borrowing costs over the long term.
“From our view, the story hasn’t changed. The (Bank of Canada) is in a cutting cycle,” he wrote.
“Whether or not it follows through with a slightly quicker pace of cuts next week, Canadians should expect rates to be steadily reduced over the rest of this year and next.”
— with files from Global News’s Anne Gaviola, Reuters
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