Canadian Inflation Cooled in June  

• Headline CPI inflation eased to 2.8% year-on-year (y/y) in June, down from 3.2% in May, thanks to lower prices at the pump.
• Prices at the pump fell 10.2% in June, but were still up 20.5% y/y. Canadians also got some relief at grocery stores, with prices for food purchased from stores up 3.9% y/y in June, down from 4.3% y/y in May.
• Shelter inflation cooled further, up only 1.5% y/y in June, down from 1.7% y/y in May. Overall services inflation was a little hotter, up 2.2% y/y and a couple of tenths higher than the prior month. Much of this was driven by higher by travel-related costs.
• The effects of the World Cup showed up in June inflation. Prices for traveller accommodation were up 10.1% y/y, and prices in Ontario and B.C. (where games were played) saw increases of roughly 20%. Rental car inflation (+6.8 y/y), travel tours (+6.8% y/y) and air transportation (+9.6% y/y) all showed evidence of higher World-cup related demand.  Though fuel costs and strong domestic demand were cited by StatCan in airfare costs.
• Core inflation also cooled a bit more than markets were expecting. The Bank of Canada’s preferred core inflation metrics (median and trim) averaged 1.9% in June, versus 2.1% in May. Lower core goods inflation likely played a role, as it took a step back to 1.1% y/y, down from 1.6% y/y in May.

Key Implications

• June’s inflation print came in a little cooler than expected. However, the rise in oil prices in recent weeks means that the downdraft from lower gasoline prices is likely to evaporate in July’s CPI.  With oil prices remaining below recent highs, we still think inflation has peaked in Canada this year.
• Inflation remains very benign in Canada, as a relatively soft demand backdrop leans against sellers raising prices. Not surprisingly, the yield on the two-year Government of Canada bond is down a few ticks in the wake of the number. June’s inflation report reinforces our view that the Bank of Canada can remain on the sidelines for quite some time.