Canada CPI Preview: Forecasts from five major banks, better inflation, but not yet good enough

We look for headline CPI to rise by 0.3% MoM as base effects pull inflation to 3.0% for the first time since March '21. Food and energy will make modest contributions on a m/m basis while shelter will remain a key source of strength on rents and MIC. Core measures should edge lower by 0.1pp to 3.75% YoY, with CPI trim/median holding stable at 3.7% on a 3m saar basis.

In Canada, the CPI could have increased by 0.2% in June (before seasonal adjustment). If we’re right, the 12-month rate of inflation should come down from 3.4% to a 27-month low of 2.9%. The core measures preferred by the Bank of Canada should decrease as well.

We expect to see a 2.9% rate in June, down from 3.4% in May and just below the top end of the BoC’s 1% to 3% target. That marks a dramatic slowdown from a peak rate of 8% a year ago. But the BoC will be focused on more recent MoM growth in the range of ‘core’ measures designed to provide a better gauge of underlying broader inflation pressures. And growth in those has been stickier at rates still above the BoC target. The BoC’s preferred median and trim CPI measures have been tracking in the range of 3 ½% to 4% at an annual rate and core services excluding shelter (BoC ‘super-core’) has been running closer to 5%.

Canadian inflation likely decelerated further in June, reaching 3.0% YoY, although that may be the low water mark for a few months as base effects become less favourable. June’s data will compare this year’s gasoline prices with the very peak of those seen in 2022, which will be the main factor behind the expected deceleration. Core (excluding food/energy) price pressures have eased, but are not yet back to levels consistent with a 2% inflation target. However, food prices remain the primary source of inflationary pressure now, with less sign of deceleration than witnessed recently in the US.

We expect a 0.4% MoM increase in headline CPI in June, a similar increase as in May but with base effects still pushing the YoY reading lower to 3.1%. If anything, risks appear tilted slightly to the downside. The most important element of CPI data over the coming months will be the average of the annualized 3-month pace of CPI-trim and CPI-median that have remained stably too high in a 3.5-4% range for close to a year. But the substantial increase in April will drop out of the 3-month period in July suggesting 3-month core inflation will likely fall below this range in July, and thus create doubt around the need for still-higher rates in September as core inflation slows.