MNI: Canada June Inflation Slows To 2.7% Led By Gas And Cars

Canada's inflation rate slowed to 2.7% in June from 2.9% in May led by gasoline and durable goods, fading more than economists predicted and in line with the central bank's confidence that more interest-rate cuts will be justified as price gains settle back to target.

Core inflation measures preferred by the Bank of Canada also held within its 1% to 3% target band, with the median index down a notch to 2.6% and matching the slowest gain since June 2021. The core trim index remained at 2.9% while the common measure officials have said is less reliable was the slowest since April 2021 at 2.3% according to Statistics Canada's report Tuesday from Ottawa.

Prices also declined 0.1% in June from May following a prior gain of 0.6%. Economists predicted the CPI would increase by 0.1% on the month and by 2.8% from a year earlier. Gasoline prices fell 3.1% in June, helping slow the 12-month increase to 0.4% from 5.6%.

The inflation figures are the last big ones before the Bank's July 24 interest-rate decision and most economists were already predicting Governor Tiff Macklem would cut again following his opening move last month, a quarter-point cut to 4.75%. The Governor played down signs of hot wage growth and the idea Canada's dollar would tumble if he diverged too far from the Federal Reserve. 

The divergence question may be less of an issue now. Last week’s U.S. CPI report showed price gains unexpectedly slowed to 3.3% in June, and most investors saw Fed Chair Jerome Powell’s Congressional testimony as leaning towards a first rate cut in September.

Canada's June inflation figures also line up with the Bank's April forecast that inflation will move below 2.5% in the second half and to the 2% target in 2025. StatsCan's report Tuesday showed car prices fell 0.4% in June from a year earlier, the most since 2015. Furniture prices fell 3.9% as supply chains loosened and the Bank's 10 previous rate hikes damped demand.

Still, services inflation was elevated at 4.8%. Housing costs are still playing an important role in the cost of living, with mortgage interest costs up 22% and rents up 8.8%. Inflation has exceeded the Bank’s 2% target for about three years now. That brings concerns about inflation expectations and second-round effects from bigger wage demands, though officials have said they are seeing clear signs of economic slack.