The annual rate of inflation in Canada hit 8.1 per cent in June as prices on gasoline surged, Statistics Canada reported on Wednesday. And economists are starting to wonder whether price pressures have peaked.
Gasoline prices were up 54.6 per cent year-over-year and 6.2 per cent month-to-month in June, contributing the most to the headline inflation jump, the agency said.
Also in the transportation basket, prices for passenger vehicles were up 8.2 per cent in June, the second-biggest driver of inflation last month. Statistics Canada added prices for used vehicles into its consumer price index (CPI) calculations in May.
Food prices were meanwhile up 8.8 per cent year-over-year, the same jump as the month before. Prices for services, which include dining out at restaurants, rent and traveller accommodations, were up 5.2 per cent.
Setting aside gas and food prices, inflation ticked up slightly to 5.3 per cent in June.
The latest inflation readings are the highest since January 1983.
In May, the headline inflation rate reached 7.7 per cent. Though the latest reading topped the eight per cent market, it fell short of consensus estimates that had inflation hitting 8.4 per cent in June.
“It’s really saying something when an 8.1 per cent inflation rate is greeted with a modicum of relief in financial markets because it wasn’t quite as awful as expected,” wrote BMO chief economist Doug Porter in a note Wednesday.
Shelter prices eased off the accelerator in June but were still up 7.1 per cent. This marks the first month-to-month decrease in the segment since August 2019, Statistics Canada said, reflecting lower real estate commissions as housing prices ease in response to rising interest rates.
Has inflation peaked?
Though gas prices fuelled the inflation surge last month, pain at the pumps has largely eased so far in July.
According to retail analytics platform Kalibrate, gas prices have dropped from a peak of $2.14 per litre in mid-June to $1.88.
Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said in a note to clients Wednesday that, “with gasoline prices expected to fall next month, we could finally have seen peak inflation.”
Porter agreed that lower gas prices should mean that the headline inflation figure retreats slightly for the July print.
He cautioned, however, that inflation will remain higher through the rest of 2022 as other segments of the household basket remain under pressure.
“While a pullback in pump prices could calm headline inflation next month, we will need to see core relent for inflation to truly peak,” he said.
Though the pace of price acceleration has slowed from May, RSM Canada economist Tu Nguyen said Wednesday that it would be “premature to declare peak inflation.”
She told Global News earlier this week that while inflation could top out by the end of summer, the global causes of inflation are too unpredictable to forecast the peak with any certainty.
“There is still a war going on,” she said. “There’s a lot of instability, geopolitical tensions and a pandemic raging. And who knows what’s going to happen on the global stage over the next six months.”
RBC assistant chief economist Nathan Janzen wrote Wednesday that there are signs of improvement in global supply chains, with ocean shipping costs and times down and commodity prices lower.
“We continue to expect that headline inflation is close to its peak,” he said in a note.
What will the Bank of Canada do?
Last week, the Bank of Canada hiked its key interest rate by a full percentage point in an effort to slow skyrocketing inflation. The rate hike was the largest single increase in more than 20 years.
Porter said Wednesday that he expects the central bank will hike rates again in September, but this time by a “more moderate” half a percentage point.
James Orlando, senior economist with TD Bank, agreed that another interest rate hike is in store for the Bank of Canada’s next meeting, with markets pricing in a 75-basis-point increase, he said in a note Wednesday.
Charbonneau noted that the Bank of Canada will have the chance to factor one more inflation reading into its decision before the next interest rate move. She said June’s numbers could give the central bank more leeway to ease off with a 50-basis-point hike, but still believes three-quarters of a percentage point is “more likely.”
Desjardins Economics said in a note Wednesday that whether the central bank raises rates by 50 or 75 basis points could hinge on the July employment report, set for release in the first week of August.
June’s jobs figures showed Canada’s labour market remains tight with a record low of 4.9 per cent. Meanwhile, wages in Canada are lagging the rising cost of living, up 5.2 per cent in June on a year-over-year basis.
Bank of Canada Governor Tiff Macklem has warned business leaders not to excessively raise wages in response to inflation, hoping to avoid a wage-price spiral that sees inflation become entrenched for the long term.
— with files from Global News’s Anne Gaviola, The Canadian Press