The Bottom Line:

A pull-back in headline inflation was widely expected in June with oil prices moving lower in after surging earlier this year, but broader measures of price growth outside of energy prices also surprised on the downside.

CPI growth slowed to 2.8% year-over-year in June from 3.2% in May, in line with our expectations. Gasoline prices fell 10% from May and other fuel prices declined 6.3%, partially reversing their sharp increases earlier this spring. Food price growth remained firm, easing only modestly to 3.5% from 3.8% in May. For households, though, gasoline remained substantially more expensive than a year ago despite the monthly decline, continuing to weigh on purchasing power.

But underlying inflation pressures outside of food and energy costs surprised broadly on the downside. CPI excluding food and energy remained below target, while the Bank of Canada’s preferred measures, CPI-trim and CPI-median, also dipped below 2%. Measures of inflation breadth were also contained, with limited evidence that earlier increases in input costs had spread significantly across the CPI basket.

That distinction remains central to the Bank of Canada’s assessment. Policymakers cannot directly influence global commodity prices and are instead focused on whether cost increases generate persistent second-round pressure across a wider range of goods and services. The June report showed little evidence of that process taking hold.

Overall, June’s report was consistent with the Bank of Canada’s latest assessment that underlying inflation remains close to target. Although the path for headline inflation remains highly sensitive to unpredictable global developments, contained broader price pressures and firming economic growth support our view that the Bank will keep the overnight rate unchanged through the remainder of 2026.

The details:

• Headline CPI fell 0.1% m/m on a seasonally adjusted basis in June, lowering the annual rate to 2.8% from 3.2% in May. This matched our expectations and came in slightly below pre-release market consensus.

• Energy price growth slowed to 14.3% y/y from 22.2% the prior month. Gasoline declined 10% m/m and fuel fell 6.3%. Despite the monthly drop, gasoline remained 20% higher than a year earlier, down from a 33% annual pace in May.

• Food price inflation eased modestly to 3.5% y/y from 3.8%. Grocery prices edged down to 3.9% from 4.3%, while restaurant prices moderated to 2.7% from 3.1%.

• CPI excluding food and energy rose 1.8% y/y, up slightly from 1.6% the prior month but still below the 2% target, continuing to point to subdued price growth outside volatile categories.

• Growth in the Bank of Canada’s preferred core measures edged lower. CPI-trim slowed to 1.8% and CPI-median to 1.9%, leaving their average at 1.9%, down from 2.1% in May.

• The trim services excluding shelter measure, sometimes referred to as “supercore,” was 2.3% y/y compared with 2.5% the prior month. The three-month average annualized rate was 2.0%, down from 2.6%.

• Measures of inflation breadth were largely unchanged. The share of CPI basket components growing faster than 3% over the past three months was 36%, compared with 37% the prior month and 41.2% in January. The diffusion index showed no meaningful broadening in price pressures.

• Traveler accommodation prices jumped 10% y/y in June, up from 2.5% in May, though this category carries relatively small weight and added little to headline growth. StatsCan attributed the increase to Toronto and Vancouver, both host cities for the World Cup.

• Shelter price growth was 1.6% y/y, compared with 1.7% the prior month. Rent inflation held steady at 3.5%, while mortgage interest costs continued their downward trend.

Source: RBC Economics