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Canada inflation expectations

Is inflation nearing a peak? Some economists think so

Despite June’s headline CPI inflation reading rising to a near-40-year high, it was less than markets had expected.

That could signal that inflation is finally nearing a peak, which would be welcome news to the Bank of Canada as it plans its next rate hike on September 7.

In June, the Consumer Price Index (CPI) accelerated to an annual rate of 8.1%—its highest level since 1983—and up from 7.7% in May. Gas prices were the main driver, rising 6.2% month-over-month, according to Statistics Canada data.

Core inflation, based on an average of three key measures that strip out the most volatile basket items, rose to 5%, up from 4.73% in May.

“High inflation continues to be the biggest risk to the economic outlook,” TD economist James Orlando wrote in a research note. “Though the rise in the yearly rate of inflation is going to grab headlines, there was a meaningful deceleration in the monthly numbers, with most categories showing less monthly price pressure.”

Shelter costs decelerated in the month thanks to key basket items rising at a slower pace compared to May. Homeowners’ replacement cost, which is related to the cost of new homes, was up 10% from a year ago compared to 11.1% in May.

The “other owned accommodation expenses” basket saw its first month-over-month decrease since August 2019, reflecting “lower real estate commissions as housing prices ease from early 2022 highs,” StatCan said.

Meanwhile, the mortgage interest cost index continued to decrease at a slower pace on a year-over-year basis, down 0.6% in June compared to a 2.7% decline in May, putting upward pressure on the all-items CPI.

What it means for the Bank of Canada

The smaller-than-expected rise in price growth is good news for the Bank of Canada, which is eager to get inflation back down to its neutral target range of 1% to 3%.

“This first negative surprise on inflation in many months will be welcomed by the Bank of Canada,” noted CIBC economist Karyne Charbonneau, adding that the Bank will have one more inflation report before its next rate decision. “With gasoline prices expected to fall next month, we could finally have seen peak inflation.”

And while TD’s James Orlando expects to see a continued deceleration in monthly inflation figures, the year-over-year numbers are still expected to remain “uncomfortably elevated through 2022.”

As such, markets expect the Bank to continue hiking its policy rate at an “aggressive clip” at its next rate announcement in September.

“Markets are expecting upwards of 75 basis points from the BoC at its next meeting and see the policy rate ending the year between 3.5% and 3.75%,” Orlando added.

Economists at Desjardins agree that relief may not be far off, but that for now prices are still running “way too hot, with 45% of the CPI basket now rising faster than 7% per year.”

“So, the only question left to answer is whether the Bank of Canada hikes rates 50bps or 75bps in September,” they added. “It looks like the odds are roughly even between the two.”