Last Monday Statistics Canada released our latest Consumer Price Index (CPI) inflation data. It confirmed that inflation cooled by more than expected last month.
Our overall CPI decreased from 3.2% in May to 2.8% in June on annualized basis (the consensus forecast was 2.9%). Stats Can noted that the 0.4% month-over-month drop in our June CPI marked its largest monthly decline since 2024.
The Bank of Canada’s (BoC) key measures of core inflation also continued to cool. CPI-Median declined from 2.1% in May to 1.9% in June (annualized), and CPI-Trim decreased from 2% to 1.8% over the same period.
Gasoline prices accounted for most of last month’s decrease. They cooled from 33.2% in May (annualized) to 20.5% in June. That deceleration is expected to disappear in July now that energy prices have re-accelerated, but they remain below their recent peaks.
The World Cup caused price spikes in travel-related expenses but not by enough to stop overall inflation from decelerating.
To me, the most important trend to note in the latest inflation data was the continued cooling of shelter inflation.
Shelter costs are the largest component of the CPI, accounting for 28.3% of the total. By comparison, energy costs account for 6.68% of our overall CPI.
Shelter costs decreased from 1.7% in May (annualized) to 1.5% in June, intensifying a downdraft that is pulling our overall CPI closer to the BoC’s 2% target.
The way that shelter prices are measured in our CPI makes them sticky, which means that when they change at their margins, it takes time before those changes meaningfully impact the data. But once a declining trend in these sticky prices becomes well established, as it is now, their disinflationary impact is long-lasting.
Shelter prices were the primary driver of inflation during the post-COVID run-up. Now, they are a powerful downdraft pulling inflation back towards its target level.
The Latest on Mortgage Rates
Government of Canada (GoC) bond yields didn’t move much in response to the latest CPI data on Monday. They spiked higher on Thursday alongside oil prices after fighting in the Middle East intensified. They fell back on Friday as oil prices cooled.
GoC bond yields, and the fixed mortgage rates that are priced on them, are likely to remain highly correlated with oil prices until the Middle East conflict is off the front pages.
Fixed mortgage rates were largely unchanged last week, but some lenders raised their rates over the weekend. Additional (albeit small) increases should be expected over the week ahead.
Variable rate mortgage discounts were unchanged.
Bond-market investors continue to price in one BoC increase at its last meeting of the year in December. The latest CPI data confirmed that our inflation remains benign. That increases the BoC’s latitude to hold steady as energy prices re-accelerate and to enact additional rate cuts to help counteract the negative impacts from additional US tariffs, if needed.
(On that note, last week US President Trump announced a new round of Canadian tariffs to take effect next month.)
My Take on Today’s Mortgage Options
My advice is unchanged from last week.
Fixed rates have been range bound for some time now, but the GoC bond yields they are priced on could be subject to wide swings in the face of so much ongoing uncertainty.
Three- and five-year terms are the most popular choices. If the spread between those two options is minimal, I still think five-year terms offer better value.
While I appreciate the appeal of fixed-rate stability in our current volatile environment, I continue to believe that variable rates will likely prove cheaper over their full terms.
(Important note: Anyone choosing a variable rate should do so only if they are comfortable with its inherent potential for volatility. Borrowers must also have the financial capacity to withstand higher costs and, in some cases, higher payments.)
The BoC continues to look through our recent inflation spike because it has thus far been limited to surging energy prices.
If the US/Iran war drags on and its associated inflationary impacts become broader and more entrenched, there may come a time when the Bank will be compelled to tighten. For now, my assessment is that we won’t get to that point. I am encouraged by the rapid drop in energy prices after the US/Iran sixty-day cease-fire was announced (and despite the retracement since then).
Trade uncertainty remains the greater long-term threat to our economy. US President Trump’s latest tariff threats are a reminder of that.
Simply put, at some point, I still believe the BoC will be compelled to lower its policy rate to a stimulative level (2% or less) in response.
Insider’s Tip for Borrowers
Does the payment frequency you choose have much impact on your mortgage?
The correct answer might surprise you.
Three Posts Every New Visitor to My Blog Should Read:
1. Should Canadians Choose a Fixed or Variable Mortgage Rate During a Trade War?
This post provides a detailed comparison of the pros and cons of fixed- and variable-rate mortgages amidst trade-related economic uncertainty.
2. What Every Canadian Borrower Needs to Know About Fixed-Rate Mortgage Penalties
For myriad reasons, some of them unanticipated, many Canadians end up having to break their fixed-rate mortgages. This post provides a detailed breakdown of the very different ways that lenders calculate their fixed-rate mortgage penalties. The amounts charged can vary significantly from lender to lender.
3. What’s in the Fine Print
This post provides a detailed summary of the key terms and conditions to pay attention to in your mortgage contract. (They are not standard and can vary in important ways.)
David Larock is an independent full-time mortgage broker and industry insider who works with Canadian borrowers from coast to coast. David's posts appear on Mondays on this blog, Move Smartly, and on his blog, Integrated Mortgage Planners/blog.