Canada’s latest inflation numbers are coming in even lower than expected. Statistics Canada (Stat Can) data released this morning shows that annual growth for the Consumer Price Index (CPI) slowed in June. Higher rates are starting to throttle demand, but not nearly enough to slow the Bank of Canada (BoC) preferred measure of inflation.
Canadian Headline Inflation Slowed More Than Expected
Canadian headline inflation showed much lower growth than the consensus estimate. Following a 3.4% increase in May, annual growth came in at 2.8% in June. It was 0.2 points below estimates, and the lowest growth seen since March 2021. The slowdown was observed broadly according to Stat Can, but the impact of gasoline drove lower growth over the past year.
Headline CPI also showed 0.1 points in growth, following flat results in May. According to Stat Can, the pressure keeping monthly growth down was travel tours in June. Yes, you read that correctly.
The central bank’s target rate for annual CPI growth is 2 points, with a 1 point tolerance above and below. At the current rate, headline inflation is now within that range, sparking many to wonder if rate cuts are coming soon. The short answer is don’t expect a cut for the remainder of this year.
Bank of Canada’s Preferred Method of Inflation Remains Elevated
Headline inflation is falling, but the central bank preferred measures are still far from the target rate. Inflation contains volatile market components, which are prone to base effects—a skew produced by using a narrow comparison of a 12-month change. Instead, the Bank of Canada (BoC) prefers to use CPI-trim and CPI-median. The former trims the most extreme measures as noise, while the later is the change in the 50th percentile of prices.
Looking at the BoC’s preferred measures reveals a less-than-encouraging picture. The average 3-month growth rate for both CPI-trim and CPI-median climbed to 3.9% in June, warned RBC.
“The newly introduced “super core” (trim services prices ex-shelter) continues to run particularly hot, at an annualized 4.8% on a three-month basis in June and matching the pace in May,” explained Claire Fan, an RBC economist.
“Similarly, the breadth of inflation pressures has also been stalling at levels that are still much wider than pre-pandemic. In June, close to 60% of the basket was still seeing above 3% inflation on a three-month annualized basis, unchanged from late 2022.”
Domestic consumer demand is slowing with higher interest rates, but core measures have been “sticky.” The bank’s sentiment reflects comments made by the BoC earlier this month, justifying the latest interest rate hike.
“The BoC last week acknowledged that higher rates are already having an impact, just not to the extent as expected to-date,” notes Fan.
Adding, “The central bank is also clearly willing to hike interest rates further if necessary.”
RBC expects higher rates to put a dent in consumption in the second half of the year. It shouldn’t be enough to require rate cuts, especially with the consumer resilience demonstrated. However, they see the slowdown pushing the central bank to pause and hold this level for the remainder of the year.
This is a huge win for Canada
Rates will soon be lowered back to 0% and housing will SKYROCKET
Trying to hold down housing is not possible in a powerhouse country like Canada
Is any one believe Stat Can?
lolllll, NO
Slightly o/t but… Why aren’t home prices included in Consumer Price Index? CPI includes prices for services and goods but not housing. Why? Maybe because it would have forced BOC to increase the prime rate years ago?
Cuts? They’ll hike one more time.
‘To be safe’
I can’t believe you guys are even mentioning rate cuts. They’re out to take their houses back.
If that were true, why would they be stretching amortizations to the legal max and illegally beyond that max? Why would they be pardoning mortgage fees and interest on interest? Something more sinister is going on. They will let you stay in “their” home with the above said “pardons” and you will rent-to-own until you die. You will own nothing but be happy, because Canadians have this misconceived perception of anything is better than renting. So even though you won’t ever own your multi-million dollar home, you will still be “happy” renting it from the bank rather than being stuck in an apartment or other form of rental.
The stretching of amortizations is political–they don’t want people losing their homes. But they also don’t want the housing bubble to collapse which would likely trigger a banking crisis.
You are so right.
Super-core? Services ex shelter? What’s this about?
A big reduction in the CPI inflation rate was baked in the cake this June given that there was a 0.7% monthly increase in June 2022. So a lot of the decrease came from the exit effect of this June 2022 monthly increase leaving the 12-month inflation rate, which Statistics Canada for no good reason insists on calling a base-year effect. The next strong exit effect will be in August 2023, when the inflation rate is likely to increase due to the -0.3% August 2022 monthly inflation rate, followed by October 2023, when the annual inflation rate is again likely to decline due to another 0.7% monthly inflation rate, this time for October 2022, leaving the annual inflation rate.
The degree of the drop is somewhat suspect, given the biggest downward contributor to the slight 0.1% monthly inflation rate for June 2022 was travel tours, with a -11.5% change. This is one of the most seasonal categories imaginable. When this index was revamped to allow pricing in all months of the year and not just the high-season winter months, but it failed to do so. Anyway, the contribution of this series to the monthly change has to be taken with a grain of salt.
The biggest upward contributor to the annual inflation rate was mortgage interest cost, which showed a 30.1% increase. This is a record increase for this series, which dates back to January 1949. The CPI excluding mortgage interest had an annual inflation rate of 2.0%; i.e., if this were the Bank of Canada’s target inflation indicator, it would already have achieved its objective of getting inflation back to target. Ironically, I had written to Chrystia Freeland, the MP for Ukraine, prior to the 2016 renewal of the inflation-control agreement, saying that she should do just that. She never deigned even to acknowledge receipt of my submission. It was, of course, too much to expect a mea culpa from her now. However, It was a bit much for her to brag about Canada having the lowest inflation rate of any country in the G7, since this hasn’t yet been established. Japan’s inflation rate dropped from 3.5% in April to 3.2% in May. A similar dramatic drop could give Japan an inflation rate that is the same as or slightly lower than Canada’s. In any case, there are substantial differences between how target inflation rates are calculated across the G7. Four of the countries, Germany, the UK, France and Italy, calculate HICPs. The US also calculates an experimental HICP, and using that measure its inflation rate was only 2.7% in May 2023 and fell to 1.4% in June 2023, much lower than ours. Freeland should have insisted on StatCan calculating a Canadian HICP when she took over as Finance Minister, to give us a comparable inflation measure to our peers, but she hasn’t and likely she won’t.
Stat Can has the same integrity as Pravda had in the Soviet Union in the 70”s .The average salary there is $148,000 a year and they stay for life so no wonder they carry the water for Trudeau and his cabal