OTTAWA--Canadian inflation eased last month as drivers saw some temporary relief at the pumps.

The country's consumer-price index fell 0.4% in June, marking its steepest decline in 18 months thanks to a sharp drop in gasoline prices, Statistics Canada said Monday. That left the annual pace of inflation at 2.8%, returning it to where it stood in April.

The 0.4-percentage-point drop in the index compared with a year earlier was steeper than that expected by economists, who had penciled in inflation of 3%, though gas prices remain elevated.

Despite some pressure on services costs linked to the start of the World Cup in June, there remain few signs that higher energy costs are leaking into inflation more broadly, though the breakdown in the Middle East ceasefire has more recently pushed global oil prices higher again. The Bank of Canada, which last week held its policy interest rate steady for the sixth time in a row, has shown a willingness to look through high energy prices as Canada's economy has shown signs of recovery.

Gasoline prices dropped 10.2% between May and June as diplomatic talks and an interim ceasefire in the Middle East led to a retreat in global oil prices. Gas was still up a steep 20.5% in June compared with a year earlier, though that compared with a 33.2% spike in May.

Stripping out gasoline, annual inflation held steady at 2.2%. The trimmed mean and weighted median measures of underlying inflation preferred by the Bank of Canada averaged 1.85% annually in June, below the bank's 2% target and at the softest level since 2020.

"After four months of oil-supply disruption, Canadian inflationary pressures still look relatively muted," Royce Mendes, head of macroeconomic policy at Desjardins, said. "Despite the recent spike in global oil prices, the Bank of Canada can rest easy that pass-through to other goods and services remains very limited."

The central bank has projected inflation will slow to about 2.5% in the second half of the year, and then return to its 2% goal by early 2027, though the forecast could be tested if oil prices remain elevated. Bank of Canada Gov. Tiff Macklem has noted inflation is currently being held back by continued slack in Canada's economy, which is growing again after having contracted for two consecutive quarters.

In addition to the break at the pumps, Canadians saw their grocery costs rise less steeply in the latest month as prices for food bought at stores rose 3.9%. Still, grocery prices have now outpaced headline inflation for 17 months in a row.

Prices for new and used vehicles contributed to the softest rise in passenger-vehicle costs since March of last year, and internet-access services fell for the month after a modest rise in prices in May. Shelter costs decelerated, showing the slowest pace of increase in more than five years.

However, the cost of traveller accommodation accelerated last month, rising 10.1% year over year. That rise was led by Toronto and by Vancouver, British Columbia, which together hosted 10 of the World Cup tournament's 79 games. The cost of travel tours also rose more steeply in June, and prices for air travel increased at their fastest rate since February 2023 on the back of increased demand for domestic travel and higher jet-fuel costs.

Ali Jaffery, chief economist at KPMG Canada, expects the reprieve for Canadians will be temporary since energy prices have shot up again in July amid the renewed escalation of the U.S.-Iran conflict. That, he said, is likely to mean headline inflation remains stuck around 3% and core inflation at 2% for some time yet.

"The Bank of Canada can live with that as long as inflation expectations remain manageable, which we expect they will as businesses absorb most of the cost increases given slack conditions in the economy right now," Jaffery said.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

July 20, 2026 10:57 ET (14:57 GMT)

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