Canada’s inflation rate falls to 2.7% in June, driving hopes for July rate cut

Is gas driving inflation?

The agency said gasoline prices rose 0.4% in June following a 5.6% jump in May. Excluding gasoline, the consumer price index rose 2.8% in June. StatCan said lower prices for durable goods also contributed to the overall slowdown in June, falling 1.8% year-over-year in the month following a 0.8% decline in May. (Read: Why is gas so expensive in Canada?)

Will interest rates go down?

CIBC senior economist Katherine Judge said the June inflation data “gave the Bank of Canada what it needed in order to cut interest rates at next week’s meeting.” She said that core inflation, which excludes food and energy prices that tend to be more volatile, ticked up 0.2% on a seasonally adjusted basis, down from last month’s 0.3% gain.

“This shows that the prior month’s upside surprise in inflation was just a blip in a broader trend of disinflation as demand in the economy remains under pressure,” Judge said in a note.

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What’s driving inflation in Canada

Grocery prices rose 2.1% year-over-year in June, up from May when they increased 1.5% from the same month a year earlier. It marked the second consecutive month that the pace of growth in grocery prices accelerated.

While the trend is something to watch, BMO’s Benjamin Reitzes, managing director of Canadian rates and macro strategist, said the level of food price growth is still “relatively subdued” and matches historical norms. “But if you get a continued ramp up here, then that will be a concern for sure,” he said in an interview. “Food prices play a very big role in how people view inflation because we buy food every day. It’s those everyday items that really drive inflation expectations.”

Fresh vegetables saw a 3.8% gain, and dairy product prices grew 2%. The price of preserved fruit and fruit preparations grew 9.5%, while non-alcoholic beverage costs rose 5.6%.

Fresh fruit prices helped moderate the increase in overall grocery prices, falling 5.2% in June compared with a 2.8% drop in May. The June inflation reading is the last before the Bank of Canada’s next interest rate decision, set for July 24. The central bank cut its benchmark interest rate by a quarter of a percentage point earlier this month to 4.75%. 

The report shows Canadian consumers have become increasingly “cautious” with discretionary spending, with notable softness in recreation and clothing, said Reitzes.