Canadian Inflation Rate Fall to 2.8% in June
Statistics Canada has reported that Canada’s inflation rate was 2.8% in June. This puts the rate within the Bank of Canada’s target range and represents the lowest rate since March of 2021. Have the Bank of Canada's countless interest rate hikes worked? And what is next for the average consumer?
We dive in with a news round-up highlighting all the information you need to know in digestible snippets in one convenient place.
The Globe & Mail reports a long road ahead:
...the fight to curb inflation isn’t over. The Bank of Canada doesn’t see it returning sustainably to the 2-per-cent target until mid-2025. And the bank’s preferred measures of core inflation, which filter out extreme price movements, have risen at annualized rates of 3.5 per cent to 4 per cent, underscoring the need for central bankers to remain vigilant in the months ahead.
Leslie Preston, senior economist at Toronto-Dominion Bank, said in a client note that the CPI report “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.”
As in previous months, the June numbers were heavily influenced by favourable comparisons to a year ago, when Russia’s aggression in Ukraine led to a surge in commodity prices.
For instance, gasoline prices fell 21.6 per cent in June from peak levels a year earlier. Excluding gas, the annual inflation rate would have been 4 per cent, down from 4.4 per cent in May.
Groceries continue to present a challenge for many households. Those costs rose 9.1 per cent on an annual basis in June, nearly matching the 9-per-cent rate in May. Fresh fruit prices rose 10.4 per cent, in part because of a 30-per-cent spike in the cost of grapes.
Mortgage interest costs rose at an annual rate of 30 per cent in June, an increase largely attributable to the Bank of Canada’s own interest-rate hikes.
Other aspects of the CPI show waning growth or outright declines.
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Global News tackles the question of further interest rate hikes by the Bank of Canada:
Governor Tiff Macklem was asked after raising rates for a second time in a row earlier this month why the Bank of Canada is continuing its rate tightening cycle if the higher costs on mortgages are now themselves a primary fuel for inflation.
Macklem said he understands that higher interest rates are “squeezing many Canadians,” but added that raising the cost of borrowing is necessary to bring overall inflation back in line. “Restoring price stability” by returning inflation all the way back to the two per cent target is better than the risk of letting price pressures run unchecked, he argued.
“There’s no easy path to restoring price stability,” Macklem said on July 12.
“We do need to slow demand in the economy. That’s what’s going to relieve those price pressures. And the way we do that is, we raise interest rates.”
Despite overall inflation trending down and settling back into the Bank’s target range, economists are warning it doesn’t mean the central bank’s work is done.
CIBC senior economist Andrew Grantham said in a note to clients Tuesday morning that Canada might retrace some of its progress in the months ahead as inflation will “likely creep back” above three per cent. Because much of the deceleration is tied to the higher gas prices of a year earlier, the impact of relatively lower prices will fall out of the annual consumer price index comparison in the months to come, he explained.
There has also been a lack of progress in taming underlying inflation — the Bank of Canada’s preferred metrics of core inflation have yet to meaningfully decline, Grantham noted.
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The Financial Post questions whether the remain inflation is being caused by the Bank of Canada:
We have this situation on our hands where the Bank of Canada itself is causing the inflation it is so worried about. Mortgage interest surged +1.6 per cent month over month and by +30.14 per cent from year-ago levels — strip this out, and the year-over-year inflation rate is at the bank’s two per cent target right on the nose. The core is at +2.4 per cent, but the three- and six-month trends are south of a +2.0 per cent annual rate on this score.
That is the key: strip out mortgage costs, and the other 95 per cent of the pricing pie is down to the bank’s target of two per cent. The central bank, hopefully, can see this. It has talked the markets into thinking another one or two more rate hikes are coming — that would be a mistake, in my opinion — completely unnecessary. But like the United States Federal Reserve, the Bank of Canada is focused squarely on lagging and contemporaneous economic indicators — a recession is still the odds-on bet.
One other thing which should be very beneficial, especially since ex-shelter inflation also is back to two per cent, is that we are seeing a very nice supply response in the Canadian housing industry, which should help alleviate the shortages and ease this pressure on the CPI data.
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