Canada’s annual inflation rate slowed to 2 per cent in August, landing in the middle of the central bank’s target range and marking the slowest pace pf price increases since February 2021. Analysts polled by Reuters had expected the Consumer Price Index (CPI) to cool to 2.1 per cent from 2.5 per cent in July.
The Bank of Canada’s closely-watched measures of core inflation (CPI-median and CPI-trim) also eased in August. CPI-median fell from 2.4 per cent in July to 2.3 per cent in August, while CPI-trim dropped from 2.7 per cent in July to 2.4 per cent.
On a monthly basis, CPI fell 0.2 per cent in August. Seasonally adjusted, CPI was 0.1 per cent higher than July.
The Bank of Canada lowered its benchmark interest rate by 25 basis points to 4.25 per cent earlier this month, leaving the door open to further cuts while warning the Bank needs to guard against the risk that inflation falls below its target. Bank of Canada Governor Tiff Macklem said at its last interest rate announcement that “with inflation getting closer to the target, we need to increasingly guard against the risk that the economy is too weak and inflation falls too much.”
Money markets are fully pricing in two 25 basis point rate cuts in as many monetary policy meetings remaining in the year, according to Reuters, but economists have said the odds of a 50 basis point rate cut are building.
Desjardins managing director and head of macro strategy Royce Mendes wrote in a report on Tuesday that “now that inflation is back to target, it’s time for the Bank of Canada to accelerate the pace of rate cuts.”
“We expect central bankers to slash their policy rate by 50 basis points next month in an effort to expedite the return to a more neutral setting,” Mendes wrote.
“The market is still only placing a 50 per cent probability on a non-standard reduction in October, but there’s no reason to wait for December after seeing these numbers. We expect market pricing to move further in the coming days after the Fed is out of the way.”
Statistics Canada said on Tuesday that gasoline helped pull back inflation, due to a combination of lower prices and base-year effects. Mortgage interest costs and rent were the top contributors to August’s increase. Mortgage interest costs have been the largest contributor to headline inflation in Canada since December 2022.
“Even though much of the easing relative to July was due to lower gasoline prices, there was good news within core measures as well,” CIBC economist Andrew Grantham wrote in research note on Tuesday.
“The bottom line then is that inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate.”
With files from Reuters.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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