Economists expect modest decline in inflation

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Economists expect that Consumer Price Index (CPI) data to be released Tuesday will show that inflation slowed modestly in June, after a surprise jump a month earlier caught many market watchers off guard.

May’s headline inflation climbed slightly to 2.9 per cent compared to the previous year, up from 2.7 per cent reported in April. The uptick was driven mainly by an increase in the price of services in the economy and was above economists’ expectations.

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This time, however, economists are confident the data will show inflation resumed its downward trajectory, giving Canada’s central bank the room to cut interest rates again at its next decision on July 24.

“If we’re judging the ‘quality’ of these inflation reports based on month-to-month movements in the broad array of core CPI measures, then the May report was the first bad one after four good ones in a row from January through April,” said Robert Kavcic, senior economist at Bank of Montreal. “So, a favourable June print would leave the running tally at five-of-six on the good side, which could very well justify further rate cut.”

Headline inflation stood at 3.4 per cent in December of last year. Core measures of inflation, the preferred data the Bank of Canada likes to look at when making its policy rate decisions, have also been on a steady decline.

“The May report was a temporary deviation from what is still a downward trend in underlying inflation and that message I believe is going to be reinforced in the June data,” said David Rosenberg, chief economist at Rosenberg Research & Associates Inc.

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Jimmy Jean, chief economist with Desjardins, expects costs in services to remain elevated. However, Jean thinks inflation in rental prices will reach a peak after the acceleration seen since 2021.

“Our forecast would imply inflation coming down to 2.8 per cent year-over-year from 2.9 per cent, which would be enough to give the nod to the Bank of Canada for a rate cut on the 24th,” wrote Jean in a forecast note.

Katherine Judge, an economist with Canadian Imperial Bank of Commerce, thinks core measures of inflation will also decrease and this slowing pace in inflation will continue into the third quarter.

“In the third quarter, the headline CPI index should drop off sharply on base effects, with inflation likely averaging 2.3 per cent year-over-year in the quarter,” Judge wrote in
a forecast note to clients. “Core measures will likely come down at a more measured pace, as mortgage interest costs ease off and demand remains soft.”

The Bank of Canada predicted inflation would ease to below 2.5 per cent in the second half of 2024, according to April’s monetary policy report. Two months later, Bank of Canada Governor Tiff Macklem said the Canadian economy was headed for a “soft landing.”

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But Rosenberg thinks the central bank is behind the curve in cutting rates and should have done so sooner, pointing to a likely recession that is looming. Canada’s unemployment rose to 6.4 per cent in June and the Canadian economy lost 1,400 jobs.

“The cat was let out of the bag at the April meeting when the bank uttered these two words in the press statement: excess supply,” Rosenberg said. “They should have cut rates at that meeting. The Bank of Canada is as far behind the economic curve as it was the inflation curve two years ago.”

Data out of the United States this past week showed an increase in unemployment to 4.1 per cent. The core inflation rate was 3.3 per cent year-over-year in June, the lowest in three years.

During his testimony in front of a senate committee on Tuesday, United States Federal Reserve Chair Jerome Powell acknowledged the risk of waiting too late to start cutting rates.

“Reducing policy restraint too late or too little could unduly weaken economic activity and employment,” Powell said.

The market is now predicting U.S. Federal Reserve officials will announce an interest rate cut in September.

This would continue to lessen concerns around any potential divergence between Canadian and U.S. monetary policy and would only reinforce the Bank of Canada’s confidence in further rate cuts this year.

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