After hitting a bump in the road in May, inflation resumed its downward trend last month. Today’s CPI report paints a more reassuring inflation picture ahead of next week’s Bank of Canada rate announcement.

Headline inflation eases - The overall Consumer Price Index rose 2.7% year-over-year (y/y) in June, a welcome development after May’s higher-than-expected 2.9% print. The main contributor for the deceleration was a slowdown in gasoline prices, with an assist from lower durable goods prices. The inflation rate has been below 3% (and inside the Bank of Canada’s 2-3% control range) every month this year.

Largely in line with consensus - Today’s headline number came in largely as expected, based on the median forecast in the Bloomberg survey. But the second quarter actual of 2.7% came in below the Bank of Canada’s April forecast of 2.9%.

Core inflation holds below 3%, but sticky - Inflation swings month to month. What really matters is underlying inflation and the so-called ‘core’ readings try to measure this. The median core measure drifted lower on a year-over-year basis to 2.6% while the trim measure held at 2.9%. However, the 3-month moving average,* which strips out year-ago base effects, moved up to 2.9% on both measures.

*Month-over-month changes in the 3-month moving average, annualized

Inflation sliced and diced - Stripping out shelter costs, the annual inflation rate was only 1.3%. Much attention has been paid to the impact of mortgage interest costs, which are related to monetary policy itself. Excluding mortgage costs, the Consumer Price Index grew only 1.9% y/y. One notable uptick came from grocery prices, rising 2.1% y/y (up from May’s 1.5%), though food prices are not the same inflation driver as they were in 2022 and 2023.

A thorn in the inflation side - Shelter costs are still the problem area, rising 6.2% y/y. The big driver remains rental accommodation costs, up 8.5% y/y in June.

Alberta’s inflation rate unchanged - Alberta’s annual inflation rate held steady at 3% last month.

Falling electricity prices (-18.4% y/y) created some drag, offsetting some of the heat from rental price inflation. Last summer, electricity prices spiked amid strong summer demand and constrained supply. Now electricity prices are falling as new capacity comes online. Further, electricity rebates and the cap that were lowering the base in early 2023 and creating upward pressure on year-over-year readings in the early stages of 2024 are now out of the picture (though deferred charges from the cap are still hitting bills).

Shelter costs are the principal driver, up 7.3% y/y and driven by a 14.5% y/y increase in rental accommodation.

Will this be enough to cut next week? After cutting in June, our previous inclination is that the Bank of Canada would wait until September for round 2. But today’s report, and some other recent data, makes next week more interesting. Let’s recap what’s happened since the June cut.

• Inflation is trending lower overall (see above) and remaining within the 1-3% control band.
• There is evidence of labour market softening and excess supply. The unemployment rate rose from 6.2% to 6.4% last month amid a rising population and a small jobs decline. GDP has improved, but is trending below population growth.
• Near-term inflation and wage expectations are easing, according to the Bank of Canada’s business and consumer outlook surveys released yesterday.  
• Renewed speculation of U.S. rate cuts is easing concerns over policy divergence. There are signs of the U.S. economy finally caving to rate hikes (the unemployment rate rose to a still-low of 4.1% in June, pushing the Sahm indicator closer to the recession threshold). The Federal Reserve Chair is talking more about the labour market moving more into balance and renewed confidence based on the latest inflation data. 

On balance, we see recent data now marginally favouring a July cut. Yet the Bank may still choose the cautious path and elect to wait until September for at least two reasons. First, it might want even more data to be convinced that the trend is holding towards 2% - the sticky core inflation measures may raise some alarm bells. Second, the combination of persistently high wage growth (+5.4% y/y in June) and sluggish productivity remains an upside inflation risk, which has been repeatedly flagged by the Bank.

It’s a close call, but we think that the latest data paves the way for the Bank to cut next week.

Answer to the previous trivia question: Frank Lloyd Wright (1867-1959) is the architect who designed the house known as Fallingwater located in southwest Pennsylvania.

Today’s trivia question: In what city is the 2024 Republican National Convention being held this week?