20 August: Canada’s annual inflation rate dropped to 2.5% in July, aligning with economists’ forecasts and reinforcing expectations for another interest rate cut in September. According to Tuesday’s consumer price index report, lower prices for travel tours, passenger vehicles, and electricity contributed to the decrease in the headline figure. Despite the overall reduction in inflation, shelter costs remain the primary driver, as Canadians continue to grapple with rising rents and mortgage payments. However, shelter price growth slowed to 5.7% year-over-year in July, down from 6.2% in June.
Inflation has consistently remained below 3% since January, demonstrating significant progress in combating high inflation. Andrew DiCapua, senior economist at the Canadian Chamber of Commerce, noted that while there is still work to be done to achieve price stability, the Bank of Canada is expected to continue its course of interest rate cuts, with another reduction likely in September to prioritize economic growth as inflation moderates.
The cooling of price growth across the economy has been aided by improvements in global supply chains and the impact of previously high interest rates. Grocery prices, once rising at a double-digit annual rate, increased by a modest 2.1% from a year ago. Prices for many goods, such as clothing and footwear, have even decreased compared to last year. However, price pressures persist in services-producing sectors, with prices for services up 4.4% from a year ago, a trend attributed to high wage growth.
Amid this backdrop of slowing price growth, forecasts widely expect the Bank of Canada to continue cutting interest rates at successive meetings. Governor Tiff Macklem has expressed concern about the risks of maintaining high interest rates for too long. At the last rate announcement, the governing council decided to lower the policy rate to 4.5%, partly to help stimulate the economy. The central bank’s next interest rate announcement is scheduled for September 4.
