Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation decelerated to 2.7% in June, in line with expectations and reversing most of the rise seen in May. The deceleration was broad-based and led by lower gasoline prices and travel service costs. The average of the Bank of Canada’s core inflation measures also edged lower in June and remained below 3% (the upper band of the inflation target) for a fourth consecutive month.
In addition, inflationary pressures narrowed in June. While the share of components of CPI rising by more than 5% was unchanged at 16%, the share of components increasing by more than 3% declined to 30% from 35%, its lowest since February 2021 (see Fig 1.). The easing suggests that many CPI components decelerated in June, further narrowing inflationary pressures, with both measures close to their historical norms.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures eased slightly in June. As such, we observe that many of the 3-month annualized changes in five of the eight main CPI components remained above 3% (see Fig. 2). The 3-month annualized changes in headline CPI is now at 2.0 %, after 2.8% in May.
However, the momentum of BoC’s core measures rose to 2.9% on average. Nevertheless, this is the fifth consecutive month that the momentum in the BoC’s core measure of inflation is at or below 3.0% (see Fig 2). While consistent with the BoC’s target, the increase in the inflation momentum could be a source of concern for the BoC as it suggests higher underlying inflation dynamic.
The Bank of Canada will welcome today’s report as a sign that inflation is back to its easing trend. With headline and core inflation remaining within the BoC’s inflation target band (i.e. below 3%), a reduction in the breadth of the inflationary pressures is likely to be considered positive progress. However, the higher momentum in the BoC’s core measure could be a source of worries. Overall, with inflation returning to its easing trend in June easing some of the concerns, we believe the BoC should cut at next week’s meeting. Whether they cut or not may be down to a more cautious approach. Our view has been that cutting again in July before taking a pause to assess the impact of the lower interest rates would be the right path.
In Alberta, inflation remained unchanged at 3.0% in June. A deceleration in transportation cost and shelter cost was offset by an acceleration in food prices. As such, shelter costs decelerated to 7.3% y-o-y, contributing 2.0pp to inflation. Food prices also accelerated and remained one of the main sources of inflation, adding 0.6pp to headline inflation. Inflation excluding food and energy (a core inflation measure) increased to 3.2%, its highest since May 2023.
The Consumer Price Index (CPI) eased 0.1% non-seasonally-adjusted in June and the inflation rate rose to 2.7%. This was in line with expectations. The decrease in prices in Junes was mainly the result of lower gasoline prices (-3.1% m-o-m), travel services (-7.0% m-o-m) and clothing and footwear (-1.9% m-o-m), which contributed -0.1 percentage points each to the monthly change in CPI. These declines were partly offset by monthly increases in food prices (+0.5% m-o-m, contributing 0.1pp) and shelter costs (+0.3% m-o-m, contributing 0.1pp).
Five of the eight major CPI components decelerated in June on a year-on-year basis. Shelter cost inflation eased to 6.2% from 6.4% and remained the main source of inflation, contributing 1.8pp to headline inflation, mainly due to higher rent (contributing 0.6pp) and mortgage interest costs (contributing 1.2pp).
Transportation costs decelerated to 2.0% from 3.5%, contributing 0.3pp, due to almost unchanged gasoline prices (+0.4% y-o-y) and lower motor vehicle costs (-0.4% y-o-y) compared to last year.
Food price inflation accelerated to 2.8% from 2.4%, contributing 0.5pp to inflation, because of higher restaurant costs and higher meat prices. Similarly, household operations, furnishing and equipment had a smaller drag on inflation than in May, with the component declining by -0.9% y-o-y and reduced headline inflation by 0.1pp. The smaller drag was due to a smaller decline in the communication component as the decline in prices from last year is dropped from the calculation.
In June, goods price inflation declined to 0.3% from 1.0%, while service price inflation increased to 4.8% from 4.6%, its highest since April 2023. Energy prices are 0.5% higher compared to the same month last year, after increasing 4.1% y-o-y in May. Excluding food and energy, prices were unchanged in June and increased by 2.9% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, rose to 1.9%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they were mixed in June. CPI-Trim edged was unchanged at 2.9%, while CPI-Median decreased to 2.6% from 2.7%. As a result, the average of the two measures inched higher to 2.75%, below 3% for a fourth consecutive month.
In Alberta, inflation was unchanged at 3.0% in June. Five out of eight CPI components decelerated on the month. Shelter costs decelerated, increasing 7.3% y-o-y compared to 8.0% y-o-y in May. Nevertheless, it remains the main source of inflation, contributing 2.0 percentage points to inflation. The easing in shelter costs was due to slower increases in utility costs compared to last year, especially electricity (-18.4% y-o-y in June vs -11.4% y-o-y in May). Similarly, rent costs decelerated slightly to 14.9% y-o-y (contributing about 0.9pp to inflation) and are rising faster than in any other province.
Food prices accelerated to 3.6% y-o-y and remained an important source of inflation in the province, contributing 0.6pp. Transportation costs decelerated to 3.2% compared to last year, as a result of lower gasoline and motor vehicle prices were partly offset by higher insurance premiums and other motor vehicle expenses. The component contributed 0.6pp to inflation in June.
Household operation, furnishing and equipment costs were a drag on inflation in June, declining 1.9% y-o-y. As a result, the sector reduced inflation by 0.3pp. Similarly, clothing and footwear prices fell 4.1% y-o-y, reducing inflation by 0.2pp.
Goods prices inflation eased to 0.2% y-o-y from 0.7% y-o-y, while services prices accelerated to 5.7% y-o-y from 5.3%, the strongest since December 2022. Inflation excluding food and energy increased to 3.2%, its highest since May 2023, while energy costs eased to -0.3% y-o-y.
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Independent Opinion
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