Economists have clarified that the unexpected decline in the national inflation rate bodes well for the prospects of the Bank of Canada making a second consecutive cut to the benchmark interest rate when it meets later this month.

Statistics Canada reported today, Tuesday, that the annual inflation rate in Canada dropped to 2.7 percent in June, down from the annual growth of 2.9 percent in May.

This slowdown was largely attributed to a slowdown in the annual growth of fuel prices.

The agency stated that fuel prices rose by 0.4 percent in June after a jump of 5.6 percent in May. Excluding fuel, the Consumer Price Index rose by 2.8 percent in June.

StatCan noted that the decline in durable goods prices also contributed to the overall slowdown in June, decreasing by 1.8 percent year-over-year in the month after a drop of 0.8 percent in May.

Catherine Judge, chief economist at CIBC, stated that the inflation data for June "gave the Bank of Canada what it needs to lower interest rates at next week's meeting."

She noted that core inflation, which excludes prices for food and energy that tend to be more volatile, rose by 0.2 percent on a seasonally adjusted basis, down from last month's gains of 0.3 percent.

Judge stated in a note, "This shows that the upside surprise in inflation in the previous month was just a signal in a broader direction towards lowering inflation as demand in the economy remains under pressure."

Grocery prices rose by 2.1 percent year-over-year in June, compared to May when they increased by 1.5 percent over the same month last year.

This is the second consecutive month that the pace of growth in grocery prices has accelerated.

While this trend is something to monitor, Benjamin Reitzes, managing director of Canadian rates and strategic economist at BMO, stated that the level of food price growth remains "relatively weak" and in line with historical benchmarks.

He said in an interview, "But if you get a sustained escalation here, that would certainly be a concern."

"Food prices play a very large role in how people perceive inflation because we buy food every day. It's those everyday items that truly drive inflation expectations."

Fresh vegetable prices saw an increase of 3.8 percent, while dairy prices rose by 2 percent. Prices for preserved fruits and fruit preparations increased by 9.5 percent, while costs for non-alcoholic beverages rose by 5.6 percent.

Fresh fruit prices helped ease the overall increase in grocery prices, dropping by 5.2 percent in June compared to a decline of 2.8 percent in May.

The June inflation reading is the last before the Bank of Canada's upcoming interest rate decision, scheduled for July 24. The central bank reduced the benchmark interest rate by a quarter of a percentage point earlier this month to 4.75 percent.

Reitzes stated that the report shows Canadian consumers have become "increasingly cautious" regarding discretionary spending, with notable softness in recreation and clothing.

Spending on shelter was also below normal, with rents rising by 0.1 percent – the lowest in nearly two years.

He noted, "This has helped constrain the headline, as shelter has been one of the areas showing strength and stable inflation for some time in Canada."

Reitzes predicted that it will be somewhat difficult to reach the Bank of Canada's target of a 2 percent annual inflation rate, noting that it has been "a slow but steady march." He stated that it is unlikely that the inflation rate will reach this level before the middle and late part of 2025.

He added, "It seems we are heading toward two percent, which is very encouraging and should be for the Bank of Canada as well."

"It's extremely difficult to put such forecasts when there are so many uncertainties. It depends on what energy prices do. We'll see what food prices do. There is also a lot of political uncertainty, which could impact the global economy."