Canada's Inflation Rate Falls to 2.8% - Gasoline and Telecommunications Services Drive the Decrease

Canada experienced a decline in its inflation rate, reaching 2.8 percent in June, the lowest level observed in over two years. The drop can be attributed to the significant decrease in gasoline prices compared to the same period last year. This decline marks the lowest inflation rate since March 2021, as reported by Statistics Canada.

During the month, gasoline prices were 21 percent lower compared to the previous year. Furthermore, telecommunications services also contributed to the decrease in the cost of living, falling by 14.7 percent year-over-year. Statistics Canada highlighted that lower prices for cellular data plans and promotional offers led to this reduction.

Additionally, prices for internet access have fallen by 3.2 percent over the past year, with a substantial decline of 5 percent in June alone. This represents the most significant one-month plunge since 2019, primarily driven by promotions in Ontario and lower prices in Quebec, according to Statistics Canada.

On the other hand, food and mortgage costs were the main factors pushing the inflation rate higher. The cost of food has continued to increase at a rate of over nine percent, resulting in nearly a 20 percent increase in grocery prices over the past two years. However, economist Claire Fan from the Royal Bank of Canada expressed optimism that food prices will soon decrease due to the dissipation of global factors that initially caused the spike.

Mortgage interest costs have surged by more than 30 percent in the past year, leading to increased expenses. Rent has also seen a notable increase of 5.8 percent over the year, making it the second-largest contributor to the higher inflation rate. Some individuals, like Calgarian Stephanie Haynes, have faced even steeper rent hikes, with her landlord announcing an increase of over $400 per month.

Recently, the Bank of Canada raised its benchmark interest rate as part of its efforts to manage inflation. Although the official inflation number has returned to the target range of one to three percent, excluding specific items reveals higher rates. For instance, removing gasoline from the data would result in a four percent inflation rate, while excluding food would yield a rate of 1.7 percent. By excluding mortgage costs, the rate would reach two percent.

The Bank of Canada tends to focus more on core inflation, which smooths out volatile items, to make informed decisions. While all three core inflation measures have declined, one remains above five percent, and the other two are just below four percent.

Economists suggest that the recent decline in inflation is likely based on one-time factors such as reduced cellphone services prices, making it uncertain if this deceleration can be sustained. As a result, inflation may increase again in the upcoming months as one-off price drops, such as those in gasoline and cellular services, dissipate.

Senior economist Andrew Grantham from CIBC anticipates a potential gradual increase in the official inflation rate as the year-over-year comparisons become less favorable, possibly surpassing three percent in the coming months.