The Canadian Consumer Price Index for June decelerated to 2.7%. Robert Both, Senior Macro Strategist with TD Securities, says Tuesday’s reading increases the odds of back-to-back rate cuts by the Bank of Canada and discusses what it means for monetary policy going forward.
Transcript
Anthony Okolie: Well, we’ve got more signs of cooling inflation in Canada as the latest read in consumer prices slowed to 2.7% year over year in June. But will it be enough for the Bank of Canada to cut rates again next week? Joining us now to discuss is Robert Both, Senior Macro Strategist with TD Securities. And Robert, welcome to the show. Thanks for joining us.
Robert Both: Thank you, Anthony. Always a pleasure to be back.
Anthony Okolie: OK. So walk us through the report. What did we see in the headline numbers?
Robert Both: So the headline number was largely in line with where we expected inflation to be. We were looking for a 2.7% year-over-year change. We were looking for a 0.1% decline on the month. But the market was looking for a stronger number. They had prices rising 0.1% month over month. So that negative surprise is a very welcome sign after the stronger report in May.
Now, even with the headline number in line with our forecast, there were some interesting developments under the surface – some good, some bad. But on the positive end, we did see a very small month-over-month increase in rents. That is going to be very good news for those that are concerned with the persistence in shelter prices.
We also saw more evidence of deceleration across those more cyclical core goods components. So, things like motor vehicles, furnitures, appliances, large items often purchased on credit – those have continued to come off. And those are now actually running in negative territory on a year-over-year basis. So that is going to give the Bank of Canada some added confidence that monetary policy continues to work.
Now, on the less great side, we did see a rather large increase in seasonally adjusted food prices. Those had been putting some downward pressure on inflation in recent months before they came back in May. And core services – so, essentially everything but shelter – those have also remained quite firm after also contributing to the stronger print in May.
Those core services also translated to stronger readings on the Bank of Canada’s preferred measures of core inflation, CPI-trim and CPI-median. The bank likes to look at these on a three-month annualized basis. And those three-month annualized rates of core inflation actually rose from 2.5% to 2.9%.
So, with core inflation around 2.75% on a year-over-year basis, we’re not really seeing that downward momentum from three-month core rates anymore. In fact, we’re starting to see some upward momentum. So that is something the Bank of Canada is going to be watching quite closely in next week’s meeting.
Anthony Okolie: So, given that backdrop, how does this set us up for Bank of Canada’s meeting next week and its rate decision?
Robert Both: Well, I think it really lets them choose their own narrative. But I think the most important part for the Bank of Canada is that headline number. Now, when the Bank of Canada gave its last inflation forecast in their April Monetary Policy Report, they looked for inflation to average about 2.9% over the second quarter. With today’s print, we now have seen Q2 inflation come in at 2.74%.
So overall, inflation has been weaker than the bank expected three months ago. So we believe that will allow them to look past those stronger rates of three-month core inflation, although they are very much a fly in the ointment of this report.
Anthony Okolie: So I was just going to say, if there’s anything in this report or some of the other economic data that we’ve received that may give the Bank of Canada some pause.
Robert Both: Yeah, so I would certainly note the three-month annualized rates of core inflation. Those core services as well – things like personal care, household services – those tend to have a tighter correlation with wage growth.
So, in the context of wages taking a little bit longer to slow, that persistence in core services is something that could get more attention from the BoC going forward as well. We don’t think that’s going to be enough to derail another rate cut in July. But as we move further into this year, the Bank of Canada is going to want to see some more progress on those fronts, we believe, before cutting rates below 4.5%.
Anthony Okolie: OK.
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