Quick take

From June’s High-Altitude CPI Reading, Will It Be a Soft or Hard Landing?

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  • In June, the Consumer Price Index (CPI) rose by 8.1 per cent (y/y).
  • Gasoline prices rose by 6.2 per cent (m/m) and were 54.6 per cent higher than a year ago. Year-over-year food prices also increased in stores (+9.4 per cent) and restaurants (+7.1 per cent).
  • Excluding food and energy, the CPI climbed by 5.3 per cent in June. Year-over-year prices were higher in all eight major CPI components. Rising prices in many shelter and transportation subcategories remained key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI went up 0.6 per cent in June, which was lower than the increase of 1.1 per cent in May.
  • The average of the Bank of Canada’s three core inflation measures bumped up to 5.0 per cent in June from 4.9 per cent in May. CPI-trim increased to 5.5 per cent, CPI-median grew to 4.9 per cent, and CPI-common moved up to 4.6 per cent.

Key Insights

After 15 months beyond the Bank of Canada’s inflation target range, have we reached the peak? Not just yet. Price growth continued to be broad-based in June. Month-over-month, all CPI categories continued to expand (in seasonally adjusted terms). Goods categories grew by 11.2 per cent (y/y)—their highest reading this year. And gasoline and shelter prices contributed most to year-over-year growth. Many commodity prices have started to fall, though elevated uncertainty about the war in Ukraine and a potential global economic slowdown will contribute to price volatility over the coming months. With price pressures still boiling over, we expect that year-over-year changes to the CPI will not start to fall until later this year.

The myriad causes of current inflation make it difficult to predict but easy to misunderstand. As Canadians cut spending amid rising prices, they may start looking for someone to blame. But the current bout of inflation has multiple causes and no “smoking gun” explanation. As inflation becomes politicized, it is worth remembering that global and domestic, and tangible and intangible factors are contributing to price growth in Canada. These factors include commodity price shocks, geopolitical uncertainty and supply chain disruption in the wake of the pandemic. A wage-price spiral has not (yet) started, though others have argued instead that corporate profits are contributing to, or at least benefitting from, this inflationary period. Effective remedies to rising living costs must recognize that price pressure is coming from (almost) everywhere all at once.

The Bank of Canada’s 100 basis point boost to the overnight rate has sent a message. The announcement hit harder than most expected and not by accident. The Bank is currently in the business of upsetting all manner of expectations. Short-term consumer inflation expectations reached record-high levels in the second quarter and expectations increased at all other time horizons. The steeper path that rates are taking will likely impress upon Canadians that the Bank is committed to bringing inflation down. But rates will also have a swifter impact on the real economy, including a harder push against the housing market. The Bank has implied that front-loading rates can increase the chance of a soft landing. But as the brakes start to screech, Canadians are bracing for impact.

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Kiefer Van Mulligen

Kiefer Van Mulligen

Economist

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