Canadian inflation remains stable in June; current monetary policy stance to remain warranted for some time

Inflation in Canada remained stable at 1.5 percent year-on-year in June. The Bank of Canada’s core inflation measure also remained steady at 2.1 percent year-on-year.

This did not come as a surprise as hot housing markets in some regions of Canada, housing and related expenditures mainly drove inflation. Canadian inflation, on the surface, has been a slight yawner in recent months, said TD Economics in a research note.

Core inflation has stayed near the central bank’s target rate, whereas headline inflation has been accelerating gradually as the effect of past declines in energy prices wanes.

Nevertheless, there are certain trends reflecting the state of Canada’s economy and the CAD’s lower level, noted TD Economics. The Canadian economy continues to work through the challenging adjustment to the sharp drop in oil prices as recently highlighted by the central bank. The inflation report for the month of June does not alter that narrative, according to TD Economics. The present monetary policy stance is expected to remain warranted for some time, added TD Economics.

Inflation for durable goods, such as appliances, cars and furniture is accelerating, reaching 3.8 percent year-on-year. It reflects the elevated level of imports in this category. In the mean time, services inflation continued to be curtailed at 1.9 percent.

It has eased from 2.4 percent year-on-year in mid-2014 before Canada was impacted by the oil price collapse, as subdued domestic demand influences services demand.

Looking into details of June’s inflation data, shelter and household operations furnishings and equipment index rose 1.6 percent and 2.8 percent respectively, largely impacting the headline inflation.

The rise in shelter costs in June was partially due to increased homeowners’ replacement costs that accelerated 3.5 percent year-on-year.

Meanwhile, food price inflation continued to ease in June. Food prices climbed just 1.3 percent year-on-year, as compared with 4 percent recorded earlier in 2016. Gasoline prices continued to exert downward pressure on the headline figure in June.

Prices at pump were down 8.5 percent year-on-year. In the transportation category, savings on gasoline were countered by increased prices for passenger vehicles, mainly because of a weaker loonie.