Canada’s annual inflation rate dropped more than expected in June, reaching a 27-month low of 2.8 percent, according to data released by Statistics Canada. This figure came as a surprise, as analysts polled by Reuters had predicted a decrease to 3.0 percent from May’s rate of 3.4 percent. On a month-over-month basis, the consumer price index showed a modest increase of 0.1 percent, falling short of the projected 0.3 percent gain.
June’s inflation reading benefited from a favorable comparison to the exceptionally high inflation experienced in the same month of the previous year. As a result, the annual rate now falls within the Bank of Canada’s control range of 1 percent to 3 percent for the first time since March 2021.
The decline in the inflation rate was primarily driven by a significant drop in gasoline prices, which fell by 21.6 percent compared to June 2022. This decrease can be attributed to China’s easing of COVID-19 restrictions, as it is the largest importer of crude oil, leading to reduced global demand.
Despite the overall decline, food prices remained elevated, with grocery prices rising by 9.1 percent year-over-year in June, slightly higher than the increase recorded in May. However, the prices of food from restaurants showed a slight deceleration in June compared to the previous month.
When excluding the volatile categories of food and energy, prices increased by 3.5 percent, lower than May’s rise of 4.0 percent.
The Bank of Canada, citing excess demand, recently stated that it expects inflation to hover around 3 percent over the next year before gradually decreasing to the bank’s 2 percent target by mid-2025, which is six months later than previously anticipated. As a response, the central bank has already raised interest rates to a 22-year high of 5.0 percent and has indicated the possibility of further rate hikes if fresh data indicates that inflation remains above the target.
The average of two of the Bank of Canada’s core measures of underlying inflation, CPI-median and CPI-trim, stood at 3.8 percent in June, slightly lower than the 3.9 percent recorded in May.
