Canada: Inflation divergence shapes BoC outlook – RBC

Royal Bank of Canada (RBC) economists Nathan Janzen and Abbey Xu expect Canadas June Consumer Price Index to show headline inflation easing to 2.8% year-over-year from 3.2% in May, mainly on lower energy prices. Core measures excluding food and energy are seen holding near 1.6%, with the Bank of Canada likely staying on hold through 2026 as inflation gradually returns toward its 2% target.

Headline softens while core stays steady

“We expect headline inflation eased to 2.8% year-over-year, down from 3.2% in May.”

“Outside of more volatile components, inflation pressures are expected to remain broadly stable.”

“We expect inflation excluding food and energy to hold close to 1.6% y/y, little changed from May, while the BoCs preferred core inflation measures are likely to remain consistent with inflation running near the 2% target.”

“Recent inflation reports have continued to point to a divergence between headline and underlying inflation with headline readings boosted by elevated energy prices, while broader price pressures have stayed comparatively contained.”

“This is in line with both the BoCs latest projections and our base case forecasts, which assume inflation will gradually return toward the 2% target over the forecast horizon while the central bank remains on hold through 2026.”