By Robb M. Stewart


OTTAWA--Canadian inflation returned to a downward path in June despite some lingering price pressures on consumers, shortening the odds of further rate relief from the central bank next week.

The consumer-price index, a measure of goods and services prices across the economy, fell 0.1% from May and cooled year-over-year price increases to 2.7%, the same more than three-year low pace as in April before a surprise acceleration the following month.

The cooldown marks a sixth straight month that headline inflation has been within the 1% to 3% band the Bank of Canada aims for, and continues the slow but steady trek back to its 2% target.

Importantly for the bank's governing council, a pair of key indicators of underlying inflation it monitors closely eased for a fourth month in the last five.

On the heels of central bank consumer and business surveys this week that point to gloomy expectations for the economy and a continued easing in cost pressures, the latest data boosts expectations the Bank of Canada will offer up back-to-back rate cuts after it last month became the first Group of Seven central bank to lower its policy interest rate.

The Canadian dollar weakened following the data and the release of flat U.S. sales numbers for June, and traders said markets are now pricing in a greater than 90% chance of a rate cut next week from roughly 80% previously.

"The economy is clearly in need of interest rate relief to ensure a soft landing," CIBC Capital Markets senior economist Katherine Judge said, noting the looming risk posed by large volumes of mortgages in the country that will soon be renewed at considerably higher interest rates.

While the economy returned to growth in the early months of the year after stalling in mid-2023, the labor market has continued to show signs of weakening as modest hiring has been outpaced by an immigration-fueled expansion of the labor force, pushing the unemployment rate up. The Bank of Canada's quarterly business survey released this week pointed to fading wage pressures, something that has been an area of concern for the central bank.

The Bank of Canada, which in early June cut its benchmark rate one-quarter percentage point to 4.75% after leaving it at a more than a two-decade high for roughly a year, has forecast inflation will continue to ease toward its 2% target, though its projections will be updated next week. Gov. Tiff Macklem has emphasized that monetary policy decisions will hinge on economic data.

Two measures of underlying inflation the central bank closely monitors cooled modestly in June after ticking up in May. Weighted median and trimmed mean CPI rose an average 2.75% last month from a year earlier, compared with 2.80% growth the month before.

The largest weight on headline inflation in June was a deceleration in gasoline price increases. Canadians also paid less for durable goods last month, driven by the largest yearly decline for passenger vehicles since February 2015, while prices fell for furniture as supply-chain issues faded and with still-high interest rates weighing on Canadians' demand for big-ticket discretionary items.

There remain signs that inflation is proving sticky in some areas.

Mortgage interest costs and rent remain the biggest contributors to year-over-year inflation, and grocery prices remain elevated. For a second straight month, consumers paid more for food bought at stores in June, though the tempo of increases has slowed.

Still, headline inflation in Canada has been easing steadily after peaking at just over 8% in mid-2022, and the monthly dip in the consumer-price index was the first in six months.

Kyle Chapman, a currency markets analyst at Ballinger Group, said while progress in cooling inflation is no longer as swift as it was early in the year it's now hard to see where any reacceleration might come from given a weak demand picture. "It would be very difficult to argue that there is any reasonable doubt about the trajectory of Canadian inflation. June's jobs data was markedly soft and telling of an economy that is begging for less restriction; it could be a costly mistake not to deliver that," he said.


Write to Robb M. Stewart at robb.stewart@wsj.com


(END) Dow Jones Newswires

07-16-24 1127ET