Canadian headline inflation decelerated as expected last month, but the underlying price indicators followed most closely by the Bank of Canada remained surprisingly sticky, arguably making a back-to-back rate cut at the central bank’s July meeting marginally less likely.
Data released by Statistics Canada this morning showed the Consumer Price Index decelerating to 2.7 percent on a year-over-year basis in June, down from the 2.9 percent increase recorded in May and matching consensus expectations. On a month-over-month basis, prices fell -0.1 percent.
As has been the case since the Bank of Canada began raising interest rates, shelter costs did the heavy lifting, rising 6.2 percentage points from the previous year, and overall services inflation accelerated to 4.8 percent from the previous month’s 4.6-percent gain.
Core inflation, computed as the average of the two price measures now preferred by the Bank of Canada (trim and median), increased 2.75 percent over the same period last year, down from a revised 2.8 percent average in the prior month. The older “CPI-X” measure, which excludes eight of the most volatile components (fruit, vegetables, gasoline, fuel oil, natural gas, mortgage interest, inter-city transportation and tobacco products) as well as the effect of changes in indirect taxes on the remaining components, climbed 1.9 percent over last year, up from 1.8 percent previously, and accelerating on a three-month average basis. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy.
Swap-implied odds on a rate cut at next week’s Bank of Canada meeting are firming, generating losses in the Canadian dollar. We’re not sure this move can be sustained, given the acceleration in underlying price pressures found below the headline numbers in today’s report. September still looks like the most probable juncture at which policymakers might be comfortable in easing policy further. However, as previously suggested, this is not a strong conviction call: the economy remains weak, inflation expectations have fallen dramatically, and Bank officials appear to be operating with a dovish bias.
South of the border, US retail spending again smashed forecasts last month, suggesting that high borrowing costs and slowing real income gains are failing to take a toll on underlying consumer demand. According to figures published by the Census Bureau this morning, so-called “control group” retail sales sales – with gasoline, cars, food services, and building materials excluded – jumped 0.9 percent in June, roundly topping forecasts set at 0.2 percent.
Total receipts at retail stores, online sellers and restaurants remained essentially unchanged on a month-over-month basis in the month – largely due to a -2 percent loss in motor vehicle sales after a devastating cyber attack – but were up 2.3 percent over a year prior. Markets were expecting a -0.3 percent monthly headline loss.
Treasury yields are rising across the curve, and the dollar is climbing as traders modestly lower the odds on a rate cut at the Federal Reserve’s September meeting. This could prove short-lived: with multiple inflation prints and a number of labour market indicators set to drop before the decision, market participants should remain wary of overreaction.