Ella 
Canada’s inflation rate is moving closer to the Bank of Canada’s 2% target, reinforcing expectations for a potential interest rate cut in September.
According to Statistics Canada, the Consumer Price Index (CPI) increased by 2.5% on an annual basis in July, a decrease from 2.7% in June and aligning with analyst predictions. This marks the lowest annual inflation rate since March 2021.
The report highlights a decline in inflationary pressures across various sectors. Prices for passenger vehicles, travel tours, and electricity have decreased compared to a year earlier. Additionally, the housing market, which has been a persistent area of financial strain, is showing signs of slight easing.
Economists and investors had anticipated that the Bank of Canada would reduce interest rates by a quarter percentage point at each of its remaining meetings this year, beginning with the September 4 announcement. The latest CPI report has not altered this expectation.
Tiago Figueiredo, macro strategist at Desjardins Securities, noted in a client report, “An inflation report like this seals the deal for another [quarter-point] rate cut at the Bank of Canada’s September meeting. It is also likely to keep central bankers cutting rates for the next few meetings.”
The U.S. Federal Reserve is also expected to cut interest rates next month, marking its first reduction of the current cycle. The Fed has maintained its target range for the federal funds rate at 5.25% to 5.5% for over a year.
In its July rate announcement, the Bank of Canada’s governing council shifted its focus to potential downside risks to the economy and the possibility of inflation falling below the 2% target. This change reflects a new approach in the central bank’s monetary policy deliberations.
Higher interest rates have impacted the economy, notably in the labor market, where the unemployment rate has risen to 6.4%, nearly two percentage points higher than its historic low from two summers ago.
Governor Tiff Macklem emphasized the need for economic growth and job creation to address the excess supply in the economy and achieve sustainable inflation targets. “We need growth to start picking up,” Macklem said last month. “We need job creation to start picking up, to absorb the excess supply in the economy and get inflation sustainably back to target.”
Core inflation measures, which exclude volatile CPI components, also showed a cooling trend in July. On a three-month annualized basis, the central bank’s preferred core inflation measures rose by an average of 2.7%, down from 2.9% in June.
Consumer prices increased by 0.4% in July compared to June, with gasoline prices contributing significantly to this rise, up by 2.4% for the month. Grocery prices also rose by 2.1% year-over-year, consistent with June’s increase but down from peak rates of around 11% in late 2022 and early 2023.
Conversely, prices for certain products, such as passenger vehicles, fell by 1.4% year-over-year in July. Used-car prices, in particular, have decreased by 5.7% over the past year due to improved inventory levels.
Shelter costs rose by 5.7% annually, a slight decrease from June’s 6.2% and the first reading below 6% since December. Although mortgage interest costs have surged by 21% year-over-year, this is down from peak increases of approximately 30% in 2023. The prospect of many homeowners renewing mortgages at higher rates in the next two years remains a consideration for central bankers.
The Bank of Canada has already lowered rates by a quarter point at its previous two meetings, reducing the benchmark lending rate from 5% to 4.5%. Macklem indicated that while the central bank is not on a “predetermined path,” it is “reasonable to expect further cuts” if inflation continues to ease. The Bank projects an average annual inflation rate of 2.3% for the third quarter and anticipates returning to its 2% target next year.
Andrew Grantham, senior economist at CIBC Capital Markets, noted, “With inflation appearing to be under control, the Bank of Canada has more leeway to set policy in response to downside risks to the economy stemming from the rise in the unemployment rate.”
