July 20, 2022 | 09:20
CPI: Behind the 8.1 Ball
Canadian consumer prices came in a little below expectations in June, for a change, but that's about where the good news ends. Prices rose 0.7% m/m in June (0.6% in seasonally adjusted terms), lifting the annual inflation rate to 8.1% y/y (from 7.7% the prior month). The sizzling read came in 2-3 ticks below consensus expectations, but was still enough to drive the annual rate to yet another new multi-decade high. Note that the monthly rise would have been at the upper end of anything seen in the decade before the pandemic, and still represents an annualized increase of just over 8%—so today's result is better, but not good.
There is likely to be some relief in next month's report, as gasoline prices are currently tracking roughly a 9% drop in July, which alone will carve almost 4 ticks from the headline tally. However, the concern is that other costs remain robust—a point clearly driven home by today's results. Most of the major measures of core inflation nudged up a bit further in June (the median held steady at 4.9%), hovering around the 5% mark. So while a pullback in pump prices could calm headline inflation next month, we will need to see core relent for inflation to truly peak.
Digging into the details, gasoline prices were the big story—as per usual—rising 6.2% m/m, and a towering 54.6% y/y. Next in line were auto prices, which jumped 1.5% m/m and 8.2% y/y, the fastest rise since the 1980s as the chip shortage just won't let go. Hotel & motel charges are blasting higher as well, surging 49.6% y/y, as revenge travel has driven this category literally off the charts historically. The housing market, meantime, is sending conflicting pressures—falling home prices cut "other owned accommodation" costs (real estate fees), while new home prices cooled, but the rapid rise in rates is about to turn mortgage interest costs from a reliable drag on inflation to a steady boost. Somehow, these interest costs were still listed as down 0.6% y/y last month, versus -8.6% a year ago.
Bottom Line: It's really saying something when an 8.1% inflation rate is greeted with a modicum of relief in financial markets because it wasn't quite as awful as expected. Perhaps the positive takeaway here is that the latest upswing was driven by all the usual suspects—gasoline, autos, motels, mortgage rates—and there were no other nasty upside surprises. Even food prices almost flattened out last month, albeit at a very high pace. Headline inflation is likely to retreat next month on the pullback in pump prices, but will probably remain quite lofty through the second half of this year. Beyond that, the Bank will be grappling with underlying inflation which seems to be settling into about a 5% clip, according to the many core metrics. And with that, we expect the Bank to continue hiking in September, albeit with a more moderate 50 bp move at that time.