If it feels like things are getting more expensive, that’s because they are.

Canada’s Consumer Price Index rose 2.8% over the last 12 months in June. That’s an improvement from May’s 3.2% year-over-year (y/y) pace, but still above the Bank of Canada’s 2% target.

Gasoline prices continue to cause massive gyrations in the headline inflation rate. Prices at the pumps were up 20.5% over the last year, owing to the war in Iran. At the same time, they fell from May—meaning that gasoline was actually adding less fuel to headline inflation last month. If we remove gasoline prices from the equation, consumer prices were up 2.2% y/y—on par with May’s pace.

Turning to other items in the CPI basket, travel-related services got a lot more expensive, especially in B.C. and Ontario. Hmmm…what happened in June in those provinces? Right, the World Cup.

Grocery prices remain one of the more stubborn items, rising 3.9% over the last 12 months (down from 4.3% in May)—outpacing the broader CPI basket for the 17th straight month.

Shelter costs are now putting downward pressure on the overall inflation rate. They were up 1.5% y/y in June, a marked deceleration from the 3.1% pace in 2025, and 5.7% in 2024. Average rents are rising at a slower rate, reflecting (with a lag) declines in asking rental rates, and mortgage interest costs are actually down slightly (-0.3% y/y).

Now for some good news. When you look beyond the month-to-month volatility—in large part caused by energy—underlying inflation, or core inflation, is cooperating. The Bank of Canada uses a couple of metrics to capture core inflation. Both the “trim” and “median” measures eased last month to below 2% y/y. That hasn’t happened since the pandemic. The reason this is good news is because so far, it does not appear that the spike in energy costs has broadened too much to other items in the CPI basket or become, in the Bank’s language, “generalized.”

Turning to Alberta, consumer prices were up 3.4% y/y—faster than the national average, but a deceleration from 3.7% in May. While gasoline prices rose at a similar rate to the rest of the country, transportation costs increased faster in Alberta, driven primarily by a jump in vehicle insurance premiums (+27.6% y/y).

What’s the Bank of Canada to do next? Today’s report on its own won’t really change the Bank’s calculus. In last week’s Monetary Policy Report, the Bank forecast 3% inflation in Q2 (the actual reading was 2.9%). What matters is the future, and that depends in large part on the duration of the war in Iran (tensions have re-escalated following the MOU). The Bank assumes that “supply disruptions are assumed to be relatively short‑lived, and weak demand hinders the ability of businesses to pass cost increases on to consumers.” The Canadian economy has been weak, but the Bank is forecasting it will get better.

The Bank will take comfort in the latest inflation readings, which show minimal energy price pass-through to other items. But it will keep a watchful eye on the ongoing conflict in the Middle East and the state of the Canadian economy. On the one hand, easing core inflation rates mean that it doesn’t need to hike yet and the Canadian economy is still too fragile for a rate increase. On the other hand, headline inflation is running too hot for a rate cut, and inflation risks remain elevated.

Our June base case forecast remains unchanged for now. We assume the Bank remains in a “wait and see” hold for the rest of the year, before raising rates by 0.5 percentage points to 2.75% by the end of 2027 (the midpoint of the Bank’s neutral range of 2.25-3.25%).

Answer to the previous trivia question: Samuel Beckett wrote the play “Waiting for Godot.”

Today’s trivia question: Which country’s team won Sunday’s World Cup Final?