The latest Consumer Price Index data for the month of June was released this morning and – in what must be music to the Bank of Canada’s ears – revealed a promising headline figure of 2.8%, down from 3.4% recorded last month, and below analysts’ expectations.
It’s the lowest the inflation measure has been since March 2021, and is a long-awaited return to the central bank’s target range of 1 - 3%; the Bank has been grappling to lower inflation, which hit a high of 8.1% last year.
According to Statistics Canada, falling energy and gas prices were a major contributor to the improved reading, as both were down 14.6% and 21.6% from a year ago, respectively.
However, food and mortgage interest costs remain stubbornly high, and are the largest contributors to the current index; food costs are still up 8.3% year over year (and roughly unchanged from May), with grocery prices up 9.1%.
Meanwhile, Canadian mortgage holders are paying 30.1% more in mortgage interest than they were last year, as a result of the Bank of Canada’s 10 benchmark interest rate hikes, and subsequent spikes in the bond market, which have pushed both variable and fixed mortgage rates higher.
Those on an adjustable payment schedule have seen their monthly payments rise over the last year and a half, while fixed-rate borrowers coming up for renewal in today’s higher interest rate environment have also seen their payment materially jump. Bond yields have eased slightly on the news, hovering in the low 3.7% range.
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Does this lower inflation spell the end of rate hikes?
That today’s inflation reading falls in line with economists' expectations is a promising sign that the Bank of Canada can ease off its rate hiking approach, and take a rate-hold stance for the foreseeable future. That would usher in an era of badly-needed stability for the Prime rate and the variable cost of borrowing. The Bank most recently increased its benchmark Overnight Lending Rate by another 0.25% on July 12, bringing Canada’s Prime rate to 7.2%, and causing today’s lowest available variable mortgage rate to rise to 6.05%.
However, the “core” inflation measures are still stickier than the Bank would like. The trimmed and median measures both decelerated to 3.7% and 3.9% year over year, while core services – such as the shelter measure – remained virtually unchanged from May at 4.8%, according to analysis from Desjardins.
“All told, there was a lot of good news in the June inflation print. Total CPI with and without energy and food slowed considerably on a year-over-year basis,” writes Desjardin’s Senior Director of Canadian Economics Randall Bartlett. “However, a broad suite of core CPI measures point to more recent underlying inflation remaining stuck in the 3.5% to 5.0% range, suggesting we’re still a long way from the Bank of Canada’s 2% target.”
“But as the Bank gave itself until mid-2025 to return inflation to 2% in its most recent Monetary Policy Report, the central bank doesn’t look to be in a rush. Given that the Bank even considered pausing at this month’s meeting, the better-than-expected inflation outcome reinforces our forecast for the overnight rate to be maintained at 5% for the remainder of the year.”