Canada's inflation rate tumbles to 2.8% in June even as grocery prices remain high

Grocery prices rose 9.1% year-over-year, slightly faster than in May

Canada's inflation rate tumbled to 2.8% in June, putting it within the Bank of Canada's target range for the first time in more than two years.

The deceleration was broad-based, though lower gasoline prices compared with last year led the slowdown, Statistics Canada said in its consumer price index report Tuesday (July 18).

But Canadians continue to pay substantially higher prices for groceries, as prices rose 9.1% year-over-year, slightly faster than in May.

The annual inflation rate was 3.4% in May. The last time it fell below three per cent was March 2021.

However, it's not all good news on the inflation front. Core measures of inflation which strip out volatility have not eased as much.

The Bank of Canada pays close attention to its preferred core measures of inflation to gauge underlying price pressures. These measures are hovering between 3.5% and 4%.

READ: Rising interest rates and the silent hunger

"Some good news, some bad news, I guess, depending on which way you want to read it,'' said Benjamin Reitzes, BMO's managing director for Canadian rates and macro strategist, in an interview.

"But enough encouraging signs, I think to make the bank a little bit more comfortable on the margin, at least with the direction that inflation is headed.''

Earlier this month, the Bank of Canada raised interest rates again in part because it's now projecting inflation to stay high for longer.

The central bank said it expects inflation to hover around three per cent over the next year, before steadily declining to two per cent by mid-2025.

Tuesday's report shows inflation falling within the central bank's 1-3% range, though the Bank of Canada has been adamant that it wants to see the rate at two per cent.

The rate hikes are intended to choke off demand in the economy by making it more expensive for consumers and businesses to borrow.

That process is supposed to bring inflation down, though in the meantime, it's driving up the interest Canadians pay on their mortgages.

The federal agency says the annual inflation rate would have been two per cent when mortgage costs are excluded.

Mortgage interest costs were up more than 30% from June 2022, when the Bank of Canada's key interest rate was 1.5% compared with 4.75% for most of June 2023. With July's quarter-percentage-point rate hike, the central bank rate is now 5%.

Tuesday's report shows prices for a range of goods and services are moderating, serving as good news for consumers who have been facing steep price increases since the pandemic.

Transportation costs, for example, decreased year-over-year as gasoline prices have fallen and the pace of price growth for vehicles decreases.

Consumers also paid 14.7% less for cellular services than they did a year ago, which the federal agency says is due to lower prices for data plans and sales promotions.

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