Canada inflation falls to 2.8% in June, below forecasts as gasoline prices weigh on CPI

Canada's annual inflation rate cooled more than expected in June, driven by a sharp decline in gasoline prices that pulled headline consumer prices lower and reinforced expectations that the Bank of Canada is likely to maintain a patient approach to monetary policy.

According to the latest inflation data, the annual Consumer Price Index (CPI) eased to 2.8 per cent in June, down from 3.2 per cent in May and below economists' expectations of 2.9 per cent. On a monthly basis, consumer prices fell 0.4 per cent, steeper than the expected 0.2 per cent decline and marking the largest monthly drop since December 2024.

The decline was largely attributed to lower gasoline prices. Although fuel prices remained higher than a year ago, the pace of annual increases slowed significantly as softer global oil prices during June translated into lower prices at the pump. Gasoline prices declined 10.2 per cent month-on-month, offsetting price increases in several other categories.

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Canada's preferred measures of underlying inflation also moderated, pointing to easing price pressures across the broader economy.

The CPI Median slowed to 1.9 per cent year-on-year from 2.1 per cent in May, while the CPI Trim eased to 1.8 per cent from 2.0 per cent. Both measures came in below market expectations, suggesting underlying inflation is continuing to move closer to the Bank of Canada's target.

Meanwhile, the CPI Common index edged down to 2.6 per cent from 2.7 per cent, although it remained slightly above analysts' expectations of 2.5 per cent.

Excluding gasoline, headline inflation was unchanged at 2.2 per cent year-on-year, indicating that underlying consumer price pressures remained relatively stable despite volatility in energy markets.

The latest inflation report is expected to strengthen the case for the Bank of Canada to leave interest rates unchanged in the near term. The softer headline and core inflation readings suggest that the earlier rise in oil prices did not trigger broader second-round inflationary pressures across the economy.

However, policymakers are likely to remain cautious as geopolitical tensions, particularly in the Middle East, continue to pose risks to global energy markets. Any renewed surge in crude oil prices could reverse the recent easing in fuel costs and put fresh upward pressure on inflation in the coming months.

Key inflation indicators

Canada's headline Consumer Price Index (CPI) declined 0.4 per cent month-on-month in June, a sharper fall than the expected 0.2 per cent decline, while annual inflation eased to 2.8 per cent, below market expectations of 2.9 per cent and down from 3.2 per cent in May. Core inflation also softened, with the CPI Median slowing to 1.9 per cent year-on-year from 2.1 per cent, and the CPI Trim easing to 1.8 per cent from 2.0 per cent, both coming in below analysts' forecasts. Meanwhile, the CPI Common measure edged down to 2.6 per cent from 2.7 per cent, remaining slightly above the expected 2.5 per cent.