As summer heats up, food prices cool

Canada's annual inflation rate held steady last month at a modest 1.5 per cent amid a welcomed cool-off in sizzling supermarket prices.

This headline-inflation number in Statistics Canada's latest consumer price index, which was released Friday, matched the year-over-year increase in May.

And for a second straight month, the annual core inflation rate, which excludes some volatile items such as gasoline prices, also remained stable at 2.1 per cent.

However, it was the information tucked in the report's underlying details that caught the attention of many analysts.

For example, Statistics Canada said lower fuel prices helped offset higher consumer costs for cars, electricity and air travel.

It also noted that prices related to shelter and households, such as items like furniture and appliances, registered the biggest gains of the major categories in the index.

But it was the long-awaited price deceleration at the country's grocery stores that likely brought some relief for the largest swath of consumers.

Frances Donald, senior economist for Manulife Asset Management, said except for May and June, the annual inflation rate for food had been above three per cent for 18 straight months. The climbing food prices, she added, were largely a consequence of the weakened exchange rate and other international factors.

In June, inflation for food was a much softer 1.3 per cent.

"It was a major headwind for the Canadian consumer for a year-and-a-half, and that headwind is now dissipating,'' Donald said in an interview.

"It's particularly important for low-income Canadian consumers who spend a larger share of their income on food.''

However, she noted the price increases for food that piled up over the previous months did not unwind.

Still, the data showed significant price gains last month for several food items. Consumers paid 19.7 per cent more for apples, 7.4 per cent more for fresh or frozen fish and 5.5 per cent more for lettuce.

In contrast, ice cream prices fell 4.8 per cent, cheese dropped 4.5 per cent and fresh or frozen beef slid 3.3 per cent.

When it came to downward pressure on overall inflation last month, the federal agency pointed to lower prices for fuel oil, natural gas and gasoline compared to the previous year.

Excluding gas from the calculation pushed headline inflation in June up to 1.9 per cent, Statistics Canada said.

"When you look at the headline numbers, inflation's at 1.5 per cent—that's reasonably soft, held down by lower gasoline prices,'' said Leslie Preston, senior economist for TD Economics.

"But when you look beneath that there still are these interesting trends.''

Preston said the continued strength of housing-related prices had been a key inflationary force over the past year.

The overall inflation reading for June was close to the expectations of economists, who had predicted a rate of 1.4 per cent, according to Thomson Reuters.

By province, Statistics Canada said Newfoundland and Labrador had the highest annual inflation rate of any province in June at 2.4 per cent, an increase from 1.5 per cent the previous month. The difference was mostly due to higher pump prices, the agency said.

Statistics Canada also released its latest figures for retail trade, which showed a 0.2 per cent increase in May compared to the previous month to nearly $44.3 billion. Total retail sales rose by a revised 0.8 per cent in April.

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Donald said retail sales were so strong in the first quarter of 2016 that the second quarter is looking comparatively weaker, which will probably be a drag on economic growth.

But she added the bigger trend in Canadian consumption and retail sales is a ``meaningful re-acceleration'' of consumer spending in 2016 compared to 2015. On top of that, she said most of the longer-term trends suggest the resilience of the consumer will continue into 2017.