Canada’s inflation rate falls to 2.8%

Canada’s inflation rate fell to 2.8 per cent in June, its lowest level in more than two years.

Statistics Canada said a sharp decline in the price of gasoline compared to this time last year was the biggest reason for the drop, which brought Canada’s official inflation rate down to its lowest point since March 2021.

Gasoline prices were 21 per cent lower during the month than they were the same month a year earlier.

Another factor pushing down the increase in the cost of living was telecommunications services, which fell by 14.7 per cent compared to what they were a year ago.

“This was a result of both lower prices for cellular data plans and promotional pricing,” Statistics Canada said.

Prices for internet access fall

Rogers finalized its purchase of rival Shaw in April, and at least in the short term, the result has been a flurry of promotional offers between the telecom giants.

The data agency noted that prices for internet access fell by 3.2 per cent in the past year, and by five per cent in the month of June alone, the biggest one-month plunge since 2019.

“This was mostly due to promotions in Ontario and lower prices in Quebec,” Statistics Canada said.

On the other side of the ledger, food and mortgage costs were the biggest single factors pushing the rate higher. The cost of food continues to increase at a more than nine per cent pace. Coming on the heels of the annual increase up to June of last year, that means the price of food has increased by almost 20 per cent in two years. That’s the fastest pace of increase in the price to fill up a grocery cart in more than 40 years, TD Bank economist Leslie Preston noted.

And mortgage interest costs are also making things a lot more expensive, up by more than 30 per cent in the past year.

The fresh inflation data comes just days after the Bank of Canada decided to hike its benchmark interest rate, for the 10th time in little more than a year, as part of its campaign to wrestle inflation into submission.

The bank justified its decision by saying more tightening was needed to get inflation back to its two per cent target. The inflation rate peaked last June at 8.1 per cent and was 3.4 per cent last month.

While it’s an encouraging sign to see the official inflation number dip back into the range of between one and three per cent that the Bank of Canada targets, there’s ample reason to think it may be a lot harder to get inflation to go lower from here.

If gasoline is stripped out of the data, the headline inflation rate would have been four per cent. If food is stripped out, the inflation rate would have been 1.7 per cent. If mortgage costs aren’t counted, the rate would have been two per cent.

Those are great examples of why the central bank pays less attention to the headline number — because it is easily skewed by individual items which can be volatile — and pays more attention to so-called core inflation, which smoothes out the noise. Of the three core inflation measures the bank tabulates, all declined, but one is still above five per cent, while the other two are barely below four per cent.

Inflation fight not over

Royce Mendes, an economist with Desjardins, says it’s too early to think that the official rate will simply slide back down to target by itself, since the drop in June was based on one-time items that probably can’t be repeated.

“The latest moves have been predicated on sharp declines in cellphone services prices, which doesn’t provide any assurance that this deceleration can be maintained,” he said. He thinks inflation could heat up again in the coming months once the “one-off” price drops for things like gasoline and cellular services are gone.

Andrew Grantham, an economist with CIBC, says he wouldn’t be surprised to see the official inflation rate inch higher in the coming months, once the year-ago comparisons become less favourable.

“Headline inflation will likely creep back further above three per cent in the coming months, as base effects from lower gasoline prices become less generous,” he said.