MNI: Canada Core CPI Stays 3% On Shelter, Total Climbs To 1.9%

Canada's core inflation rates remained around 3% in June because of elevated shelter costs while headline prices quickened as expected, adding to evidence that without a major disruption from the U.S. trade war economic data is giving the central bank has little scope to cut interest rates at the end of the month.

Statistics Canada's "trim" core inflation rate was unchanged at 3% while the "median" index moved up a tenth to 3.1%. Both measures are at the top of the Bank of Canada's 1% band around its 2% target for headline prices. Governor Tiff Macklem has said that while core rates may overstate trend inflation it's likely above 2%.

Total inflation quickened to 1.9% from 1.7% as economists expected, but is distorted by April's cut to the federal carbon tax. Excluding energy the pace remained 2.7%. Officials say they will distinguish between the one-time effect of the tax cut and underlying pressures.

While there was little sign tariffs are boosting prices outside of a gain in women's clothing in StatsCan's report Tuesday, core and headline inflation were elevated by familiar pressure from shelter, underlining why the Bank has held rates for the last two meetings after seven prior reductions. Rental rates climbed 4.7% and even with the past interest-rate cuts feeding through mortgage costs climbed 5.6%. 

Vehicle price gains also accelerated to 4.1% in June from a year ago from May's 3.2%. That included new cars and the first gain in used car prices in 18 months. The slower decline in gasoline prices also provided a lift to inflation, StatsCan said.

Governor Macklem said at the last meeting he's giving special attention to elevated core inflation, but also that he could return to cutting rates if the economy falters and inflation is under control. This is StatsCan’s last major data before the Bank’s July 30 rate decision. Other reports have suggested a less dire trade-war scenario and odds of a rate cut diminished with Friday’s report of a major gain in jobs and the first decline in unemployment since January.

The Bank also presents quarterly business and consumer sentiment surveys next Monday. Economic data is less important to the Bank’s outlook with Donald Trump again boosting threats of tariffs while moving back his deadline to Aug. 1. Officials have pointed to the drag on investment and confidence as the dispute continues, and the prospect of slower overall growth and sustained inflation.

StatsCan also reported factory sales fell 0.9% in May, partly because of shutdowns in the energy industry but also weakness in machinery. An agency survey found the share of manufacturers hurt by tariffs declined to around half of respondents in May from about 60% in April. 

Trade war or not, cutting borrowing costs again with sticky core prices could put the Bank's reputation at risk as it was during a burst of inflation seen through the Covid rebound.

The Bank in April gave up on a precise economic forecast to instead give two scenarios based on the intensity of the trade war. In the mild scenario the economy would stall in the second and in the more painful one would contract to mark the start of a likely recession. It's not just tariffs clouding Canada’s economic outlook because Prime Minister Mark Carney won’t present a budget until this fall after winning the April 28 election and economists estimate a deficit well above his campaign promises.