Headline inflation slowed to 2.8 per cent in June, beating analyst estimates of a year-over-year increase of three per cent, but some economists warn it could again rise above three per cent in the months to come.

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

'Bank of Canada can't get too excited': What economists are saying about inflation numbers Back to video

We apologize, but this video has failed to load.

Try refreshing your browser, or
tap here to see other videos from our team.

Play Video

Statistics Canada said on July 18 most of the drop in the consumer price index (CPI) was a result of a 21.6 per cent decline in gasoline prices from last year. It said the “deceleration was fairly broad-based,” but said inflation was up four per cent, excluding gasoline.

June marked the first time since 2021 that CPI came in under the Bank of Canada’s target of one to three per cent, Statistics Canada said.

However, the central bank likely won’t be “too excited” by June’s reading, said Stephen Brown, deputy chief North American economist at Capital Economics. He expects a slowdown in energy inflation will likely “soon be reversed” and bring headline inflation back above three per cent.

Brown and others noted that readings for the bank’s preferred inflation measures remain stuck above three per cent — at an average of 3.8 per cent on an annual basis.

Further, almost half of the items included in the CPI basket rose five per cent year over year, said Charles St-Arnaud, chief economist at Albert Central, adding the share of items that rose more than three per cent increased 67 per cent.

“Little progress in the reduction in the percentage of components rising by more than three per cent and five per cent continues to worry the Bank of Canada as it is a sign that inflation remains broad-based,” he said.

Markets are currently pricing in a 30 per cent chance of an interest rate hike at the Bank of Canada’s next announcement on Sept. 6, according to Bloomberg.

Here’s what economists said about the latest inflation numbers and what they mean for the Bank of Canada and any further rate hikes.

Charles St-Arnaud, Alberta Central

“June will likely mark the lowest point for inflation in 2023, as the base effect that brought inflation down since the beginning of the year will gradually fade away. As such, inflation is expected to rise above three per cent in the coming months. While inflationary pressures remain high and the short-term dynamic suggests some stickiness in core inflation, we believe the BoC will be patient and will stay on the sideline for some time. The decision to raise rates again hinges on whether the domestic economy slows, reduces excess supply, and further moderation in inflationary pressures. In the coming months, a lack of progress on both fronts could trigger further hikes.”

Stephen Brown, Capital Economics

“The Bank of Canada can’t get too excited about the decline in headline inflation to 2.8 per cent in June, as it mainly reflects a fall in energy inflation which will soon be reversed. Although the CPI excluding food and energy rose by just 0.1 per cent m/m in seasonally adjusted terms, there was little sign of easing price pressures in the bank’s preferred core measures.

“Meanwhile, the annual rate of energy deflation in June of -14.6 per cent is likely to mark the trough, with a rebound taking overall headline inflation back above three per cent in the coming months. The upshot is that, while some parts of the June CPI data lend support to our forecast that the bank will keep its policy rate at five per cent over the rest of the year, it is still too soon to rule out another rate hike altogether.”

Leslie Preston, TD Economics

“Canadian inflation continued to make encouraging progress in June. However, the cooling in headline inflation is benefiting from sizable base effects, due to the favourable comparison to high energy prices last June. The Bank of Canada is watching its preferred core measures — CPI-trim and median — which continue to show glacial progress.

“BoC governor (Tiff) Macklem emphasized last week that the bank has become worried about the persistence of underlying inflation pressures in the economy. The June inflation data likely provides some reassurance that things are moving in the right direction, but not fast enough for the Bank of Canada to let its guard down.”

Benjamin Rietzes, BMO Economics

“The June CPI report had a little something for everyone, with the headline rate slowing more than expected, but the BoC’s core metrics remaining sticky. However, the improvement in the old core and excluding food and energy provides a bit of offsetting good news. With another CPI report coming before the next meeting, the BoC will be patiently waiting for more data as they head into their August quiet period.”

Randall Bartlett, Desjardins Economics

“All told, there was a lot of good news in the June inflation print. Total CPI with and without energy and food slowed considerably on a year-over-year basis. However, a broad suite of core CPI measures point to more recent underlying inflation remaining stuck in the 3.5 per cent to five per cent range, suggesting we’re still a long way from the Bank of Canada’s two per cent target. But as the bank gave itself until mid-2025 to return inflation to two per cent in its most recent Monetary Policy Report, the central bank doesn’t look to be in a rush. Given that the bank even considered pausing at this month’s meeting, the better-than-expected inflation outcome reinforces our forecast for the overnight rate to be maintained at five per cent for the remainder of the year.”

Andrew Grantham, CIBC Economics

“Headline inflation will likely creep back above three per cent in the coming months, as base effects from lower gasoline prices become less generous. However, it was the stickiness of core inflation measures which was a concern for the Bank of Canada, and with CPI-trim and median showing little further progress towards the target band there remains a very real risk that interest rates could be raised again after the summer. With our preferred core measures of inflation already showing clearer signs of waning price pressure, we continue to think that the Bank of Canada is overshooting what was necessary in order to bring price pressures under control, and see inflation dipping below two per cent in the second half of next year (three quarters earlier than the bank’s MPR (Monetary Policy Report) forecast for a return to two per cent by mid-2025.”

Claire Fan and Abbey Xu, RBC Economics

“Expectations for headline inflation rate to slow back to target range by mid-2023 have largely been correct. But the BoC’s preferred core measures are proving much stickier, in part supported by resilience in domestic consumer spending. The BoC last week acknowledged that higher rates are already having an impact, just not to the extent as expected to date. The central bank is also clearly willing to hike interest rates further if necessary. We continue to expect the full impact of rate hikes to date to come through gradually, slow spending over the second half of this year and for that to push the central bank back on the sidelines with no additional interest rate hikes this year.”

• Email: gmvsuhanic@postmedia.com | Twitter: gsuhanic