Annual inflation fell to 2.8% in June in Canada, Statistics Canada reported Tuesday, putting it within the Bank of Canada’s target range for the first time in more than two years.
In its report on the consumer price index, the federal agency pointed out that the deceleration was widespread, even if gasoline prices were the main contributors to the slowdown.
In addition, Canadians continue to pay significantly higher prices at grocery stores, where prices rose 9.1% year over year, slightly faster than in May.
Annual inflation stood at 3.4% in May. It had not been below 3.0% since March 2021.
However, not all the news is good on the inflation front. Measures of core inflation—which exclude the items whose prices are the most volatile—have not declined as much.
Bank of Canada targets
The Bank of Canada pays particular attention to measures of core inflation to gauge underlying price pressures. These measures fluctuate between 3.5% and 4.0%.
“Good news, or bad news, I guess, depending on how it’s read,” Benjamin Reitzes, Bank of Montreal’s managing director for Canadian rates and macro strategy, said in an interview. .
“But there are enough encouraging signs, I think, to make the bank [centrale] a little more comfortable in the margin, at least in terms of the direction that inflation is taking,” he believes.
The Bank of Canada raised interest rates again earlier this month, in part because it expects inflation to stay elevated for longer. Its key rate is now at 5.0%.
In announcing its rate decision, the central bank explained that inflation would hover around 3% over the next year, before gradually declining to 2% by mid-2025.
Tuesday’s report shows inflation in the Bank of Canada’s 1% to 3% range, although the latter was adamant that it was in fact targeting the midpoint of that range, i.e. 2%.
Interest rate hikes aim to stifle demand in the economy by making borrowing more expensive for consumers and businesses. This process is supposed to slow inflation, although in the meantime it will drive up the interest Canadians pay on their borrowings such as mortgages.
According to Statistics Canada, excluding mortgage interest charges, annual inflation would have been 2% in June.
Price moderation
Tuesday’s report shows prices for a range of goods and services are moderating, which is good news for consumers, who have faced steep price increases since the pandemic.
Mortgage interest costs have increased by more than 30% compared to June 2022, when the Bank of Canada’s key interest rate was at 1.50%. By comparison, it was 4.75% for most of June 2023. With July’s quarter-percentage-point rate hike, the central bank’s policy rate is now 5.00% .
Transportation costs, for example, have fallen year over year as gasoline prices have fallen and the pace of vehicle price growth has slowed.
Consumers also paid 14.7% less for cellular services than a year ago, which the federal agency said was due to lower data plan prices and sales promotions.
