The annual inflation rate in Canada rose to 1.9% in June from 1.7% in May, aligning with market expectations. Despite the pickup, the rate remained below the Bank of Canada’s mid-point target of 2% for the third consecutive month.

Headline inflation grew at a faster pace, as gasoline prices fell to a lesser extent in June (-13.4%) than in May (-15.5%). Additionally, faster price growth for some durable goods, such as passenger vehicles and furniture, put upward pressure on the CPI in June.

Prices for food purchased from stores rose 2.8% year-over-year in June, following a 3.3% increase in May.

Year over year, the CPI excluding energy (+2.7%) remained higher than the CPI in June, partly due to the removal of consumer carbon pricing in April.

Monthly, the CPI rose 0.1% in June. On a seasonally adjusted monthly basis, the CPI was up 0.2%.

There’s also another important sign of firmer price pressures: The share of components in the consumer price index basket that are rising by 3% or more — another key metric the central bank’s policymakers are watching closely — expanded to 39.1%, from 37.3% in May.

The chart below, created by our friends at Mortgage Logic News, shows that  Canadian economic data have come in stronger than expected on average in recent weeks. This was evident in the June employment report. As a result, the Bank of Canada is likely to remain on the sidelines on July 30 for the third consecutive meeting. The Canadian economy appears to be weathering the tariff storm better than expected, at least for now.

While we expect to see a negative print on Q2 GDP growth, a bounce back to positive growth in Q3 is also possible, precluding the much-expected Canadian recession.

The June inflation data, released today for the US, was weaker than expected for the core price index. Declines in car prices helped mitigate tariff-related increases in other goods within the US consumer basket.

The US inflation data could draw even greater calls from President Trump for the Federal Reserve to lower interest rates. While some officials have expressed a willingness to cut rates when the central bank meets in two weeks, policymakers are generally still divided as to whether tariffs will cause a one-time price shock or something more persistent. They will leave rates unchanged for now.

April and May were months of the most significant tariff uncertainty–both auto, steel, and aluminum tariffs were announced during this period. The 0.1% drawdown in April GDP had a wide variety of special factors at play in that month of high drama. The biggest drag by far was a steep 1.9% fall in manufacturing, including a 5.2% drop in the auto sector, as firms dealt with the initial wave of tariffs, as well as some further pullback after earlier tariff front-running.

Tariff front-running led to a surge in US imports in the first quarter. Revisions to the Q1 data in the States now show a 0.5% contraction, worse than initially reported.

Other trade-related sectors were soft, with wholesale trade down 1.9% and transportation & warehousing off 0.2%. Providing some offset was the Federal election in the month, which boosted federal public administration 2.8% m/m. StatCan notes that the start of the NHL playoffs, with five Canadian teams in the mix (more than usual), boosted the arts and entertainment sector by 2.8%. Hotels and restaurants also firmed (+0.6%), potentially supported by Canadians vacationing closer to home, and the NHL playoffs may have also contributed to the increase. Were it not for the election boost and entertainment, real GDP would have been down 0.2% in April.

May’s expected drop was due, in part, to the reversal of the election bump in public administration spending, as well as softness in the resource sector and retail trade. Notably, StatCan did not mention manufacturing as a source of weakness. Still, earlier this week, it reported a 1.3% drop in May factory sales and a 0.4% decline in wholesale in flash reports, which no doubt also weighed.

The Federal Reserve’s preferred inflation gauge, the PCE price index minus food and energy, rose 0.2% — slightly more than expected, though still consistent with limited price pressures.The decline in spending, which was broad-based, coincides with depressed consumer sentiment this year in response to President Donald Trump’s unpredictable trade policy. Inflation has been muted so far in 2025, although many economists expect it to pick up in the next few months as businesses increasingly pass higher import duties on to households.

The latest figures suggest sluggish US household demand, especially for services, extended into May after the weakest quarter for personal consumption since the onset of the pandemic. Spending on transportation services, meals out, accommodation, financial services, and other services — a category that includes net foreign travel — all declined last month. US personal income, meanwhile, fell in May by the most since 2021 on a pullback in government transfers, led by a decrease in Social Security payments. The saving rate fell to 4.5%.

Bottom Line

Chair Jay Powell told Congress this week that he expects inflation to pick up in June, July and August as tariffs become increasingly reflected in consumer prices. However, he added that if that prediction fails to materialize, the US central bank could resume interest-rate reductions sooner rather than later.

Weaker consumer and business spending, along with modest inflation, bode well for another rate cut by the Bank of Canada as well. There is another whole month of data before the BoC meets again on July 30. Many economists now believe the Bank’s rate-cutting cycle is over. I’m not convinced.

June marked the first time in five months when the economy created enough jobs to keep unemployment from rising, after months of tepid gains and losses. At the same time, Canada added a net of 143,800 jobs over the last six months, the slowest first-half year pace since 2018, excluding the pandemic, with a monthly average of 24,000 job gains.

The central bank has held interest rates at 2.75% for the past two meetings, and its path ahead will depend mainly on how the economy and inflation adapt to tariffs and trade uncertainty. While the economy is expected to slow in the second quarter, firm inflation remains a concern for policymakers, who will set rates again on July 30.

Traders in overnight swaps trimmed expectations of easing at that meeting, putting the odds of a quarter percentage point cut at about 15%, from 30% before the release.

The employment rate—the proportion of the population aged 15 years and older who are employed—increased by 0.1 percentage points to 60.9% in June. The employment rate had previously recorded a cumulative decline of 0.3 percentage points in March and April and had held steady in May.The number of employees increased in both the private (+47,000; +0.3%) and public (+23,000; +0.5%) sectors in June, while the number of self-employed workers was little changed.

There were 1.6 million unemployed people in May, an increase of 13.8% (+191,000) from 12 months earlier. A smaller share of people who were unemployed in April transitioned into employment in May (22.6%), compared with one year earlier (24.0%) and compared with the pre-pandemic average for the same months in 2017, 2018 and 2019 (31.5%) (not seasonally adjusted). This indicates that people face greater difficulties finding work in the current labour market.

The average duration of unemployment has also been rising; unemployed people had spent an average of 21.8 weeks searching for work in May, up from 18.4 weeks in May 2024. Furthermore, nearly half (46.5%) of people unemployed in May 2025 had not worked in the previous 12 months or had never worked, up from 40.7% in May 2024 (not seasonally adjusted).

The layoff rate—representing the proportion of people who were employed in April but became unemployed in May as a result of a layoff—was 0.6%, unchanged from May 2024 (not seasonally adjusted).

In June, the unemployment rate among core-aged women fell 0.3 percentage points to 5.4%. Among core-aged men, it was little changed at 6.1%, as the number of job searchers held steady despite the employment gains.

Notably, age 25-54 employment rose 90,600 (which is the most significant increase on record, excluding the 2020-2022 pandemic distortion), lowering their jobless rate to 5.8%, reversing May’s increase.

There were 1.6 million unemployed people in June, little changed in the month but up 128,000 (+9.0%) on a year-over-year basis.

Compared with one year earlier, long-term unemployment was up in June 2025. Over one in five unemployed people (21.8%) had been searching for work for 27 weeks or more in June, an increase from 17.7% in June 2024.

More people are employed in wholesale and retail trade, health care, and social assistance.

Employment in wholesale and retail trade increased by 34,000 (+1.1%) in June, the second consecutive monthly gain. The increase in June was concentrated in retail trade (+38,000; +1.7%). On a year-over-year basis, employment in wholesale and retail trade was up by 84,000 (+2.9%).

Employment change by industry, June 2025

Agriculture was the only industry with a notable employment decline (-6,000; -2.6%) in June. On a year-over-year basis, employment in agriculture was little changed. Amazingly, the manufacturing sector showed a considerable job gain in June, rising 10,500, breaking a four-month losing streak. GDP may bounce back in June, but Q2 is still tracking negative, suggesting productivity was much softer, too.

Regionally, Alberta, Ontario and Quebec accounted for the bulk of job gains, while Atlantic Canada was a soft spot. Ontario’s jobless rate slipped a tick to 7.8%, still well above the national average and the highest among the larger provinces. That comes in sharp contrast to B.C., where a significant decline in the labour force pulled the unemployment rate down 0.8 ppts to 5.6%, third lowest in the country behind Saskatchewan (4.9%) and Manitoba (5.5%).

Hours worked were solid as well,  up 0.5% m/m in June, leaving them up 1.3% annualized for the quarter.

Wage inflation also continues to decelerate, providing some relief for the Bank of Canada. However, with the labour market showing some resilience, the odds of an overnight rate cut in July are minimal.

In other news, Trump Threatens 35% Tariff on Some Canadian Goods: The U.S. will put a 35% tariff on imports from Canada effective Aug. 1, President Trump announced on Thursday evening. But an exemption for goods that comply with the nations’ free-trade agreement, the U.S.-Mexico-Canada Agreement, would still apply, accounting for just over 90% of Canadian-US trade. A White House official said, stressing that it could change. WSJ

Barring a sharp decline in next week’s CPI data for June, which is unlikely, the strength in today’s jobs report and the recently heightened uncertainty on the trade front likely keep the BoC on the sidelines when it meets late this month.

A reduced rent price increase and a decline in travel tour prices put downward pressure on the CPI in May compared with one year earlier. Smaller declines for gas and cellular services put upward pressure on the index compared with the previous month.

Excluding energy, the CPI rose 2.7% in May, following a 2.9% increase in April.

The CPI rose 0.6% in May, and on a seasonally adjusted monthly basis, it was up 0.2%.
The shelter component grew more slowly year over year in May, rising 3.0% following a 3.4% increase in April.

Rent prices rose 4.5% yearly in May, compared with a 5.2% increase in April. Rent price growth slowed the most in Ontario, with prices rising 3.0% in May following a 5.4% increase in April. The increased availability of rental units, coupled with slower population growth compared with the previous year’s spring, contributed to the slowdown in rent price growth in May. Given Ontario’s considerable weight nationally, these effects alone were enough to offset faster price growth in seven other provinces.

The mortgage interest cost index decelerated for the 21st consecutive month in May (6.2%)  after rising 6.8% in April.

Year over year, prices for travel tours fell 0.2% in May after rising 6.7% the previous month. Prices for air transportation decreased 10.1% on an annual basis in May, following a 5.8% decline in April.

Gasoline led the decline in consumer energy prices again this month, down 15.5% year over year in May after declining 18.1% in April. Gasoline prices in May remained below May 2024 levels, primarily due to the removal of the consumer carbon levy.

In May 2025, gasoline prices increased 1.9% month over month. The increase was primarily attributed to higher refining margins, partially due to higher switching costs to summer blends.

Prices for new passenger vehicles rose 4.9% yearly in May, after increasing 4.6% in April. Higher prices for some electric cars primarily drove this faster price growth.

After last month’s uptick in core inflation, some give-back was expected. The labour market remains soft, and tepid domestic demand growth should keep a lid on inflationary pressures. Retail sales were weaker than expected. As has been the case this year, the outlook heavily depends on how trade negotiations evolve, but the soft economic backdrop should give the BoC space to deliver two more cuts this year

The Bank of Canada has said that it doesn’t want to see a tariff problem turn into an inflation problem. It has also suggested that its CPI trimmed-mean and CPI Median measures of core inflation might be biased upward because of measurement issues (They are expected to publish more about this in the future.)

While the Bank won’t give up its hard-won credibility as an inflation fighter, further easing in economic growth will likely force the central bank to cut rates one or two more times this year.