Lower gasoline prices helped to cool June inflation to 2.8 per cent, but there were slowing price pressures elsewhere, say economists.

Analysts had estimated the June consumer price index (CPI) would be 2.9 per cent, down from 3.2 per cent in May and below the top end of the Bank of Canada’s target range of one per cent to three per cent.

The CPI measures that the Bank of Canada prefers also came in below its inflation target of two per cent for the first time since 2020, also undershooting analyst estimates for them to remain above or on target.

Here’s what economists think the latest inflation numbers mean for the economy, the Bank of Canada and interest rates .

‘Next move a cut’: Rosenberg Research

There is “nothing here for the Bank of Canada to be worried about and validation for the central bank’s move to remove its de facto ‘tightening bias’ at last week’s (interest rate) meeting,” David Rosenberg, president of Rosenberg Research & Associates Inc., said in a note.

The drop in gas prices aside, he said there was broad-based weakness in many sectors. including food, shelter, household operations, clothing and health care.

Transportation costs fell 1.4 per cent month over month as new and used car prices retreated, he said.

“The big news,” he said, was the slowdown in shelter inflation, with rental rates coming down while “home price deflation is well underway.”

Rosenberg said there are zero signs that the costs of United States tariffs and the war with Iran are leaking through to inflation expectations and wages.

But real gross domestic product (GDP) growth and employment are flat year over year, and he said the economy could “relapse” as uncertainty over the Canada-U.S.-Mexico Agreement weighs on corporate capital spending.

“This well-behaved inflation data gives the Bank of Canada not just the leeway to stay on the sidelines, but to make the next move a rate cut,” he said.

‘Still too early’: Servus Credit Union

“Most of the change in inflation was due to lower gasoline prices,” Charles St-Arnaud, chief economist at Servus Credit Union, said in a note, adding that prices at the pumps aren’t hitting consumers elsewhere so far.

He cited the average of 1.85 per cent for core mean and trimmed core CPI, the Bank of Canada’s preferred measures, as well as inflation excluding food and energy at 1.8 per cent year over year, while the momentum in the core measures decreased to 1.6 per cent in June.

St-Arnaud said the slowdown in inflation could be over because of the renewed fighting between the U.S. and Iran.

“With gasoline and diesel likely to remain elevated, it is probably still too early for the Bank of Canada to lower its guard,” he said, adding that he expects policymakers to continue holding interest rates at the current level of 2.25 per cent for the rest of the year.

‘Some upside risk’: BMO

“A 10.2 per cent drop in gasoline prices weighed heavily on the headline, but there was softness elsewhere as well,” Benjamin Reitzes, managing director of Canadian rates and a macro strategist at BMO Capital Markets, said in a note.

Food inflation cooled in June for the second time in three months on lower prices for fruit and vegetables, though grocery store inflation was still stuck around 3.9 per cent year over year, a level it’s maintained for a while, he said. He expects grocery store inflation to cool in the coming months on improved base effects.

Shelter inflation slowed to 1.5 per cent year over year, with mortgage interest costs “tame” and home prices “flat,” he said.

“While the broader housing market is showing signs of bottoming, we’re not anticipating an upswing in prices, which should keep shelter inflation contained,” he said.

Reitzes also pointed to the unexpected slowdown in core inflation to under two per cent.

“There’s still some upside risk from oil/energy prices, but it’s clear that the output gap (slack in the economy) is weighing heavily on underlying inflation,” he said, calling for the Bank of Canada to hold rates at their current level for the rest of the year.

  • Inflation cools to 2.8% as Canadians get break from rising gas prices
  • A ‘notable upgrade’: economists weigh in on the Bank of Canada’s outlook and latest rate decision

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