Canada’s annual inflation rate slowed to 2.7 per cent in June from 2.9 per cent a month earlier, a softening that removes at least one obstacle to another potential Bank of Canada interest rate cut next week.

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The month-over-month easing in inflation was largely the result of gas prices, which were up just 0.4 per cent year-over-year in June compared to a 5.6 per cent increase in May. Excluding gasoline, inflation would have decelerated to 2.8 per cent.

Other components with slowing price growth in June included shelter inflation, which rose by 6.2 per cent year-over-year, down from 6.4 per cent in May, and transportation, which decelerated in June to two per cent year-over-year, down from 3.5 per cent in May.

On the other side of the equation, factors that maintained the pressure on prices included rent inflation, which remained high at 8.8 per cent year-over-year and mortgage interest costs, which rose by 22.3 per cent.

“These are parts of the basket I think that we’re really seeing pressure that is persisting,” said Dawn Desjardins, senior economist with Deloitte. “I think it’s a demand story with a lack of supply, so that is actually keeping those elements hotter than expected.”

The price of durable goods declined year-over-year by 1.8 per cent, driven by the largest decline in passenger vehicle sales since February of 2015. However, despite continued improvements in the price of goods, growth in the price of services remained elevated at 4.8 per cent year-over-year in June, up from 4.6 per cent in May.

Another sticky point was the cost of food bought at stores, which rose year-over-year by 2.1 per cent in June, up from 1.5 per cent in May. Over the past three years, the price of food purchased in stores has risen by 21.9 per cent, though overall inflation in this category has been trending down since January of 2023.

Core measures of inflation, the data the Bank of Canada prefers to look at when makings it monetary policy decisions, continued their downward trajectory.

CPI-common and CPI-median each dropped by 0.1 percentage points year-over-year, to 2.3 per cent and 2.4 per cent respectively. The third core measure, CPI-trim, stayed the same at 2.9 per cent.

However, the three-month annual average of these measures rose to 2.9 per cent in June from 2.5 per cent in May, something economists said could signal overall inflation may remain at the higher end of the central bank’s two-to-three per cent target range for longer.

“This (implies) that the annual pace of inflation should remain in the upper end of the Bank of Canada’s one per cent to three per cent range over the coming months,” wrote James Orlando, senior economist with Toronto-Dominion Bank, in a note to clients. “This has been propelled, not just by shelter prices, but also by price gains in ‘nice-to-haves’ like the cost of dining out, health spending and household operations.”

During the central bank’s last policy rate announcement on June 5, Bank of Canada Governor Tiff Macklem said the bank will be making its policy decisions on a meeting-by-meeting basis. Since the last rate announcement, the unemployment rate has risen to 6.4 per cent and business sentiment has continued to soften.

Katherine Judge, senior economist at the Canadian Imperial Bank of Commerce, thinks the central bank should trust its forecasts and cut its rate again when it meets on July 24.

“The economy is clearly in need of interest rate relief to ensure a soft landing with future headwinds such as large mortgage renewals and population growth that could crater,” Judge wrote in a note to clients. “With headline inflation back within the target zone and the Business Outlook Survey showing firms’ inflation expectations are edging down, any worries of upside risks to inflation or inflation being stuck above target is missing the mark.”

• Email: jgowling@postmedia.com

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