EconoFACTS

July 18, 2023 | 09:25

Canadian CPI (June) — Some Encouraging Signs

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian consumer prices rose 0.1% and 2.8% y/y in June, two ticks below consensus and the slowest yearly pace since March 2021. On a seasonally-adjusted basis, CPI also rose 0.1% following May's flat reading, the tamest two-month pace since 2020. Base effects played a role this month as well, as prices were still firm a year ago, helping cut the yearly pace. However, the next couple of months were much tamer in 2022, so it will be more challenging for inflation to slow in the near-term. Nonetheless, the better-than-expected headline result is somewhat encouraging as it is a step in the right direction bringing down inflation expectations.

The main sectors driving the tame headline reading were household operations & furnishing and recreation. On the former, cell phone plan prices plunged 7.6%, following a similar-sized move in the prior month. That's the second largest two-month move in the seven-year history of the series. On the recreation front, a 4.4% drop in travel services prices and a near-7% decline in other recreational equipment were the main contributors to the pullback in the sector. Note that food prices were up 0.3% (seasonally adjusted), with the yearly rate holding at +8.3% y/y.

Core inflation metrics weren't quite as encouraging. The BoC's favoured measures, Median and Trim, both slowed a tick on a yearly basis to modestly below 4%. However, on a 3-month annualized basis, the Median was steady at 3.6% and the Trim actually accelerated to 4%. Just to make things a bit more convoluted, the other core measures showed some slowing. Canada's old core, CPIX, slowed half a point to 3.2% y/y, while the 3-month annualized rate slipped to 2.7%. And, CPI ex. food and energy also slowed half a point to 3.5% y/y, with the 3-month rate falling to 2.5%. It's worth noting that even if the Trim and Median rise 0.3% m/m in July, the 3-month annualized rates will fall into the low-3s, so there's likely some good news coming next month.

Key Takeaway: The June CPI report had a little something for everyone, with the headline rate slowing more than expected, but the BoC's core metrics remaining sticky. However, the improvement in the old core (CPIX) and ex. food & energy provides a bit of offsetting good news. With another CPI report coming before the next meeting, the BoC will be patiently waiting for more data as they head into their August quiet period.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics