On July 18, according to Statistics Canada, Canada experienced a deceleration in its annual inflation rate to 2.8% in June. This was primarily due to the base-year effect causing lower gasoline prices. However, despite this slowdown, the costs of food and mortgage interest continued to remain high. Notably, the actual figure surpassed analysts' predictions, as they expected the annual inflation rate to drop to 3.0% from the previous month's 3.4% in May.

Royce Mendes, Director & Head of Macro Strategy at Desjardins, highlights that the Bank of Canada's preferred measures of core inflation, which exclude significant fluctuations in individual categories, indicate persistent price pressures. The three-month annualized rate of the core median measure remained stable at 3.6%, while the trimmed mean indicator increased to 4.0% from 3.9% in May.

Mendes further notes that their calculations show the core-services excluding shelter measure in June was only slightly lower at 4.8%. Consequently, there exists the possibility for headline inflation to pick up speed in the coming months, as some of the recent progress may be attributed to temporary declines in prices.

Nevertheless, despite indications of persistent underlying inflationary pressures and the resilience observed in economic activity indicators, the Bank of Canada has allowed itself a considerable timeframe to attain the 2% target.

According to Michael Greenberg, Senior Vice President and Portfolio Manager at Franklin Templeton Investment Solutions, the headline inflation number has notably fallen below expectations, even dropping below the 3% mark, a significant milestone. However, when analyzing the core measures that the Bank of Canada prioritizes, they still remain at elevated levels well above the 2% target.

Commentary from Various Economists:

Andrew Kelvin, Chief Canada Strategist at TD Securities, emphasizes that while the headline inflation is moving in a positive direction, the core measures show more persistence in inflationary pressures. He believes that the Bank of Canada may pause and allow interest rates to take their course due to the lagged effects of previous rate hikes and the overall trend of inflation.

Kelvin also mentions that a downside surprise in the headline number would have been preferable to an upside surprise, indicating that the Bank of Canada may not be greatly encouraged by the current inflation figures, as the core inflation remains persistent.

Jules Boudreau, Senior Economist at Mackenzie Investments, views the numbers as promising, particularly the sticky nature of core inflation. However, Boudreau suggests further scrutiny of the data is required before celebrating. He believes that if upcoming economic data aligns with the central bank's expectations, it could signal the end of rate hikes, especially considering the uncertainty surrounding the July decision.

Looking ahead, Boudreau predicts slightly positive base effects but notes that the significant effects witnessed in the past few years are dissipating. The year-on-year inflation rates are expected to be more aligned with month-on-month figures. He also points out that even though monthly inflation was low, driven in part by energy prices, the core inflation three-month annualized rate remains above 3.5%, indicating that more efforts are needed to manage inflation. Boudreau concludes that the current monetary policy is likely restrictive enough to address the inflationary challenges.

Reporting by Steve Scherer, Nivedita Balu, Fergal Smith; Editing by Denny Thomas

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