Canada Inflation

Slowdown in Inflation Could Solidify a Second 
Consecutive Interest Rate Cut

Annual price growth back on downward trend. Inflation hit 2.7 per cent in June — marking the sixth consecutive month within the central bank’s target range — and down from the surprise uptick of 2.9 per cent in May. The deceleration was largely due to slower year-over-year growth in gasoline prices as well as a 1.8 per cent drop in the cost of durable goods, an indication that elevated interest rates continued to rein in spending. While the Bank of Canada’s preferred measures of core inflation saw its three-month annualized change increase to 2.9 per cent, year-over-year measures were promising, with CPI-trim holding stable at 2.9 per cent and CPI-median falling to 2.6 per cent. With inflation falling by more than the consensus estimate of 2.8 per cent, a second consecutive interest rate cut in July is now the most likely outcome.  

Markets react favourably to inflation print. With the unemployment rate hitting 6.4 per cent in June, along with the recently released business outlook survey suggesting further price easing ahead, money markets were pricing in an 83 per cent chance of a July rate cut just prior to June’s inflation release. Now, with inflation falling by more than the consensus estimate, bond yields immediately fell across the curve and the Canadian dollar depreciated. At the same time, investors increased their bets for a July cut, with the market now penciling in an 87 per cent chance of  a second consecutive rate reduction. Nevertheless, with the closely watched three-month annualized change in CPI-trim and CPI-median indicating that momentum in core inflation picked up, an interest rate pause in July cannot fully be ruled out.

Commercial Real Estate Outlook

Price of groceries reaccelerate. Food inflation has been trending down over the past 24 months. This comes after supply chain disruptions and global insecurity pushed inflation in the segment to a high of 10.4 per cent in January 2023. However, food purchased from stores saw annual price growth accelerated for the second consecutive month, to 2.1 per cent in June. A contributing factor is that groceries are considered an essential item. In the current environment of elevated inflation and interest rates, consumers have been redirecting spending more toward necessity-based products, leading to upward pressure on prices. Consequently, this greater emphasis on essential spending is one reason why grocery-anchored retail has held as a preferred investment option over the past year.

Falling borrowing costs set the stage for investment recovery. After the central bank held its overnight rate at 5.0 per cent for nearly a year, the monetary authority cut its key interest rate for the first time in over four years in June. This combination of interest rate stability, along with underwhelming economic performance, has caused bond yields to largely trend down since October of last year. Consequently, investment activity across Canada’s major commercial property types has slowly been gaining momentum. While on a year-over-year basis total dollar volume was still down in the second quarter, preliminary estimates indicate a 16 per cent increase when compared to the first three months of the year. Looking ahead, with borrowing costs set to fall further, positive investor sentiment is likely to grow, stimulating transaction activity heading into 2025.      

* Through February; ** Through 1Q 2024

Sources: Marcus & Millichap Research Services; Altus Data Solutions; Bank of Canada; Canada Mortgage and Housing Corporation;
Capital Economics; CoStar Group, Inc.; Statistics Canada