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Consumer Price Growth Fell to 2.8% in June—But Will It Get Stuck There?

Canadian Economics

By: Kiefer Van Mulligen

  • In June, the Consumer Price Index (CPI) rose by 2.8 per cent (y/y). This was lower than May’s 3.4 per cent (y/y) increase.
  • Gasoline prices rose by 1.9 per cent (m/m) but were 21.6 per cent lower than a year ago. Year-over-year, food prices increased in stores (+9.1 per cent) and restaurants (+6.6 per cent).
  • Core CPI (excluding food and energy) grew by 3.5 per cent in June (y/y), lower than the 4.0 per cent increase (y/y) in May. Higher prices in several shelter and food subcategories were key to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.1 per cent in June (compared to a 0.0 per cent increase in May).
  • The average of the Bank of Canada’s three core inflation measures fell to 4.2 per cent in June from 4.3 per cent in May. CPI-common fell to 5.1 per cent, CPI-median dropped to 3.9 per cent, and CPI-trim slid to 3.7 per cent.

Key Insights

  • After spending more than two years above the Bank of Canada’s 3 per cent upper target range, year-over-year growth of the consumer price index fell to 2.8 per cent in June. Lower gasoline prices compared to the same month last year contributed to dragging headline inflation down, though price growth deceleration was comparatively broad-based. Mortgage interest costs continued to accelerate in June and will add to inflationary pressures over the coming months. However, this is an anticipated effect of the Bank of Canada’s rate increases. Excluding mortgage interest costs, the consumer price index grew by 2.0 per cent (y/y).
  • But inflation remains elevated. Falling energy prices, base effects, and higher interest rates have brought consumer price growth within the Bank of Canada’s target range—but not fully back to its 2 per cent target. Consumers’ near-term inflation expectations continued to fall in the second quarter of 2023, but they remain far above pre-pandemic norms and the Bank’s target. Year-over-year price growth of food purchased in stores inched upward again in June. As one of the more salient prices for consumers, food price growth has a disproportionate impact on setting expectations for future inflation. And it will be several quarters before it decelerates to a more familiar rate. Russia recently declined to renew a deal that has guaranteed the safety of grain Ukrainian grain exports, which could trigger an increase in global food prices. Wage growth has tepidly moderated, which will ease some inflationary pressure if the labour market maintains its tepid slowdown. But some firms report that they aren’t finished raising prices in the wake of cost increases over the past three years. This will likely keep the scale and frequency of price changes elevated as the year unfolds.
  • The Bank of Canada was concerned enough about the current state of inflation to warrant another interest rate hike in July. The stubborn persistence of core inflation was a key justification for the latest hike—the second since the Bank cancelled the pause to its rate hiking cycle last month. In June, the Bank’s two primary measures of core inflation (CPI-trim and CPI-median) averaged 3.8 per cent. These measures averaged 4.5 per cent between January and May 2023. While core measures are falling, they are decelerating more gradually than headline inflation. The direction of core inflation over the coming months will be a key factor for determining the direction of monetary policy—and the financial fate of Canadians—from here. In this brave new world of stickier inflation, expectations that rates will begin to fall in early 2024 may be premature.

For more details about our inflation forecast and inflation’s impact on the Canadian economy, please consult our Canadian Three-Year Outlook.

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