Consumer Prices (Jun.) - Capital Economics
Canada Economics

Consumer Prices (Jun.)

Canada Data Response
Written by Stephen Brown

The re-opening of the economy and the rise in Hydro prices in Ontario caused inflation to increase by more than expected in June. An average of the three core inflation measures ticked up to 1.7%, but we expect it to edge back down this month and we doubt it will return to 2% within the next few years.

Core inflation likely to edge down in July following unexpected rise

  • The re-opening of the economy and the rise in Hydro prices in Ontario caused inflation to increase by more than expected in June. An average of the three core inflation measures ticked up to 1.7%, but we expect it to edge back down this month and we doubt it will return to 2% within the next few years.
  • The jump in inflation to 0.7%, from -0.3%, was much stronger than the consensus expectation for an increase to 0.3%. The rise in gasoline inflation to -15.7%, from -29.8%, was largely as expected, but the overall rise in energy inflation to -8.8%, from -19.0%, was stronger than we anticipated. That was because Hydro prices in Ontario rose by more than we expected as the reduced lockdown tariffs expired and charges switched to a newly-introduced rate, which caused electricity prices to surge by the most since May 2003.
  • The rise in inflation was not all due to energy prices, however. Clothing inflation rose from -5.4% to -2.6% as stores re-opened, while a rebound in rental prices pushed rental inflation back up to 1.8%, from 1.4%. Given auto sales remain depressed, it was somewhat surprising to see that new vehicle inflation rose to a nine-month high of 2.7%, from 2.0%. That may reflect reduced inventory, given that production ground to halt for almost two months. Recreation, education and reading inflation also rose by over 1%-point, in part due to rebounds in travel-related items.
  • The broad nature of the rise was reflected in the three core inflation measures. CPI-median was unchanged at 1.9%, but CPI-trim rose from a downwardly-revised 1.6% to 1.8% and CPI-common increased by 0.1%-point to 1.5%. (See Chart 1.) Our calculations suggest that base effects will weigh on core inflation this month, thereby pulling the average back down from 1.7% to 1.6%, but the moves in June confirm our suspicion that core inflation has troughed at a much higher rate than elsewhere. Nevertheless, given the huge amount of spare capacity that has opened up, we doubt that core inflation will return to 2% on a sustained basis within the next few years.

Chart 1: Measures of Core Inflation (%)

Sources: Refinitiv, Capital Economics Calculations

Table 1: Consumer Price Index

Total

Core, %y/y

8 Major Components, %m/m*

%m/m*

% y/y

Com.

Med.

Trim.

Food

Shelter

H’hold

Cloth’g

Trans’t

Health

Recr’tn

Alcoh’l

Mar.

-0.9

0.9

1.6

2.0

1.8

-0.4

0.2

0.1

0.1

0.2

-0.1

0.2

-0.2

Apr

-0.7

-0.2

1.5

2.1

1.8

0.1

-0.1

0.3

-0.1

-4.1

-0.1

-0.4

-0.1

May

0.1

-0.4

1.4

1.9

1.6

1.1

-0.3

0.2

-6.9

-2.4

-0.2

-0.5

0.1

Jun

1.0

0.7

1.5

1.9

1.8

-0.1

-0.3

-0.3

-0.9

2.9

-0.2

-1.2

-0.1

Source: Refinitiv. *seasonally-adjusted


Stephen Brown, Senior Canada Economist, stephen.brown@capitaleconomics.com