News & Analysis

The Canadian dollar continues to focus on how its US counterpart trades this morning as its rally stops short despite a positive inflation read. Higher shelter, gas and elevated food prices helped the headline CPI index rebound from negative territory in June, posting a 0.7% YoY rise vs -0.4% in May.

Despite expectations, Statistics Canada didn’t release the “adjusted CPI” data today that was announced at the Bank of Canada meeting last week. The joint effort by the central bank and the statistics agency is aimed to fill the shortcomings of the traditional CPI reading due to the dramatic shift in consumer preferences due to the pandemic. The adjusted rate uses anonymized aggregate high-frequency payment data to adjust the component weightings of the CPI basket to give a more representative reading of the level of inflation felt by the consumer. Looking at the adjusted rate in June’s MPR for May, greater weighting was put on food and shelter weighting, which together accounted for nearly 58% of the adjusted rate, whereas recreation, education and reading along with clothing and footwear took a low weighting.

This suggests, that similar to the May reading which was really 0.3% higher (-0.1% YoY) in adjusted terms, today’s headline CPI reading understated the true level of inflation felt on the ground by consumers.

Looking at the components for the headline reading in June, food prices rose 2.7% (down from 3.1% in May) while shelter prices rose to 1.7% (up from 1.0% in May). This suggests to us that the headline CPI reading underreported the adjusted rate by around the same amount as in May; 0.2-0.3%.  Nonetheless, the 1% MoM increase in inflation, the largest rise since March 2011, is testament to the impact loosening measures are having on demand conditions.

Further details:

  • five out of eight components of the CPI index printed in positive territory, with just household operations, furnishing and equipment, clothing and footwear and recreation, education and reading posting deflationary readings. In the adjusted basket for May, however, these three components add up to just 21.39% of the more representative consumer basket. All of these components showed signs of improvement though, posing less of a drag on the overall CPI reading.
  • Gasoline prices declined less on a YoY basis in June at -15.7% than in May (-29.8%). This is the second consecutive month of slower price declines after the crash in March/April. This coincides with the gradual opening up of businesses and public services as well as a gradual increase in local travel in June.
  • Rents rebounded in June, rising 0.6% on a monthly basis. Following a monthly decline in May, the first since July 2017, the mortgage interest cost index fell 0.3% MoM continued to fall in part due to declining bond yields – evident that the Bank of Canada’s actions is beginning to filter through to protect Canada’s housing market; a key source of fragility due to the previous rapidly rising house prices and heightened household indebtedness.
  • Prices for electricity rose by 17.2% in Ontario MoM, the largest increase since May 2003 as the provincial government introduced a higher electricity price after significantly lowering them in March due to the outbreak of Covid-19.
  • The average of the Bank of Canada’s core measures rose from 1.63% in May to 1.73% YoY in June.


CPI rises at the fastest rate (1% MoM) since March 2011


Bank of Canada’s “adjusted CPI” index has progressively reported higher and higher inflation readings vs the official CPI index


Loonie barely reacts to the CPI release as broad dollar move remains key driver in disjointed markets today

  • Level of 100 marks the opening price for USDCAD this morning
  • The loonie barely reacted to today’s CPI release but instead sold-off as the dollar generally rebounded in markets


Author: Simon Harvey, FX Market Analyst


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