Canadian CPI lowers to 2.7% in June
Penelope Graham, Head of Content
The chances of a July rate cut increased this morning, as the latest Canadian inflation numbers showed improved progress towards the Bank of Canada’s (BoC) 2% target.
Statistics Canada reports that the Consumer Price Index (CPI) increased at a rate of 2.7% year over year in June, down from 2.9% in May, and marking a 0.1% monthly decrease. Slowing gas prices were the main factor behind the deceleration, rising just 0.4% last month compared to 5.6% in May.
The price of durable goods also dipped by -1.8%, which helped pull down the price of the all-items CPI. However, grocery prices increased again for the second consecutive month, up 2.1% compared to 1.5% in May. Compared to June 2021, says StatCan, prices for food purchased in stores have increased 21.9%.
Shelter inflation, a major contributor to the CPI, softened to 6.2%, down from 6.4% in May. The impact of slightly lower mortgage rates as a result of the BoC’s June 5th rate cut are evident, with mortgage interest costs lowering to 22.3%, compared to 23.3% in May and 24.5% in April. Rent costs, however, remain largely unchanged at 8.8%, marking just a 0.1% decline from the previous month.
Other core inflation measures, called the CPI Trim and CPI median – which are closely watched by the central bank – also rose at a slower pace, at 2.6% and 2.9%, respectively.
June inflation paves the way for another summer rate cut
Overall, this most recent inflation print offers further evidence that the BoC’s aggressive rate hiking cycle – in which it raised Canada’s benchmark cost of borrowing 10 times between March 2022 and July 2023 – has been effective in reigning in the measure. The BoC now has further reassurance that the economy is materially slowing, giving it the room to lower interest rates this month, and into 2025.
“The June reading is a turnaround from May’s higher-than-expected print, re-affirming the economy is slowing, and setting a path for Canada’s central bank to further ease borrowing costs,” write RBC economists Claire Fan and Abbey Xu.
Additional data released this week from the BoC on business and consumer sentiment also support the rationale to cut rates, indicating expectations around pricing and wage growth are lowering.
“All told,” they add, “we expect the BoC will carry on with easing the monetary brakes on a weak economy, and follow up with another rate cut at its July meeting next week.”
Why does the Bank of Canada want to lower inflation?
A main mandate for Canada’s central bank is to keep the annual pace of inflation growth close to a 2% target; this is considered a stable range, with inflation well aligned with wages and affordability for consumer goods. When inflation rises too high, Canadian shoppers certainly feel it, while in line at the grocery checkout or the gas pump.
However, too-low inflation – or deflation – indicates a very sluggish economy, characterized by high rates of unemployment. To maintain this balance, the BoC uses a couple of tools to control inflation’s growth. One of these is the BoC’s Overnight Lending Rate, which is used as the benchmark for the cost of borrowing in Canada; the prime rate is based on this rate, and, by extension, variable mortgage rates and other borrowing products. The returns of other investing products, such as GICs and high-interest savings accounts, are also based on this rate.
When inflation increases at too quickly a pace – as it did at the end of the pandemic lockdowns – the BoC will increase its benchmark rate, which makes it pricier for consumers to borrow and spend, which helps lower inflation. However, when the economy is slowing – as data indicates it currently is – the central bank can then lower the cost of borrowing, providing Canadians with some economic relief via lower interest rates.
What does the June inflation report mean for mortgage borrowers?
Today’s lower inflation reading could translate into lower mortgage rates, both for fixed- and variable-rate borrowers.
Variable mortgage rate holders will the most directly impacted if today’s report does indeed lead to another BoC cut this month. As these rates are directly influenced by the BoC and prime rates, these borrowers will see their monthly payments – or the amount of their payment that services their principal mortgage debt – lower immediately.
Those who are currently shopping for a fixed mortgage rate may also see lower options in the weeks to come; lenders base fixed rates on bond yield pricing, which is highly reactive to the BoC’s rate direction. Bond yields have hovered in the 3.3% range over the past week as markets grow more optimistic of more rate cuts; today’s CPI print will further support those expectations.
The next Bank of Canada rate announcement is July 24, 2024.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.