Canada's inflation falls to 27

By Ismail Shakil and Which country has a large foreign exchange trading marketSteve Scherer

OTTAWA (Reuters) -Canada's annual inflation rate dropped more than expected to a 27-month low of 2.8% in June, data showed on Tuesday, led by lower energy prices while food and shelter cost increases persisted.

Analysts polled by Reuters had forecast inflation to drop to 3.0% from 3.4% in May. Month-over-month, the consumer price index was up 0.1%, Statistics Canada said, which was also lower than the 0.3% forecast.

June's reading, which benefited from a comparison to the four-decade high inflation a year earlier, means the annual rate was within the Bank of Canada's 1% to 3% control range for the first time since March 2021. The bank targets 2% inflation.

"Inflation is definitely moving in the right direction, but we're seeing stickier and more persistent core measures," said Michael Greenberg, senior vice president and portfolio manager at Franklin Templeton Investment Solutions.

Excluding food and energy, prices rose 3.5% compared with a 4.0% gain in May. Grocery prices rose 9.1% year-over-year in June, a tick higher than the increase recorded in May. Prices of food from restaurants slowed slightly in June from May.

Shelter costs increased a seasonally adjusted 0.5% in June from May.

The average of two of the Bank of Canada's (BoC) core measures of underlying inflation, CPI-median and CPI-trim, came in at 3.8% compared with 3.9% in May.

"The Bank of Canada's preferred measures of core inflation, which exclude significant moves in individual categories, show that underlying price pressures remain sticky," said Royce Mendes, head of macro strategy at Desjardins Group.

The three-month annualized rate of the core median measure remained at 3.6%, while the trimmed mean indicator accelerated to 4.0% from 3.9% in May, Mendes said.

The Bank of Canada last week raised rates to a 22-year high of 5.0%, its tenth rate increase in less than 18 months, and said it could hike them further if fresh data shows inflation is stalling above its target.

The central bank, citing excess demand, said last week that it expects inflation to remain around 3% over the next year before dropping to the bank's 2% target by mid-2025, six months later than previously anticipated.

"We're still not at 2%," said Jules Boudreau, senior economist at Mackenzie Investments. "So there's still some work to be done. But policy is probably restrictive enough at the moment to do that."

Money markets trimmed bets for a rate hike that the BoC's next meeting in December to a 19% probability from 25% before the data.

The price of gasoline, which led the slowdown, fell 21.6% compared with June 2022 when China, the largest importer of , eased some COVID-19 public health restrictions that contributed to higher global demand.

The Canadian dollar was trading 0.2% lower at 1.3225 to the greenback, or 75.61 U.S. cents.

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