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Canada’s headline inflation rate continued to ease in June, falling to a rate of 2.8%, slower than the 3.4% pace recorded in May.

It also came in below forecasts, with a consensus of economists expecting a reading of 3%. The drop was largely due to drops in prices for gasoline and fuel oil, which were down an annualized 21.6% and 31.5%, respectively. Excluding gasoline, CPI growth was 4 % compared to 4.4% in May, Statistics Canada noted.

The mortgage interest cost index, however, was up 30.1% on a year-over-year basis and remains one of the largest contributors to overall inflation. Statistics Canada noted that excluding mortgage interest costs, the inflation rate in June would be just 2%.

The Bank of Canada’s preferred measures of core inflation, CPI-trim and CPI-median, also continued to ease in June, but at a slower pace. Their annualized growth rates fell to 3.7% and 3.9%, respectively.

“Expectations for headline inflation rate to slow back to target range by mid-2023 have largely been correct,” noted RBC economist Claire Fan. “But the BoC’s preferred core measures are proving much stickier, in part supported by resilience in domestic consumer spending.”

What it means for the Bank of Canada

Given that the Bank of Canada was most concerned about the stickiness of core inflation, the slow progress made on that front in June means “there remains a very real risk that interest rates could be raised again after the summer,” noted CIBC economist Andrew Grantham.

“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 lets its guard down,” added TD economist Leslie Preston.

However, if the Bank does deliver another quarter-point rate hike in September, raising its benchmark rate to 5.25%, Grantham believes they would be “overshooting what was necessary in order to bring price pressures under control.”

Others believe the progress being made on the inflation front will be enough to keep the BoC on the sidelines for the remainder of the year.

“…we’re still a long way from the Bank of Canada’s 2% target,” wrote Randall Bartlett, senior director of Canadian Economics at Desjardins, noting that Bank gave itself until mid-2025 to return inflation to 2% in its most recent forecasts.

“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 5% for the remainder of the year,” he added.

July inflation data will be released on August 15, 2023.