Canada’s annual inflation rate dropped to a 40-month low of 2.5% in July, aligning with forecasts, while core inflation measures also eased, according to data released on Tuesday. This development supports expectations that the Bank of Canada may cut interest rates again in September.
Analysts surveyed by Reuters had predicted a decrease in inflation to 2.5%, down from 2.7% in June. The consumer price index rose by 0.4% on a monthly basis, also matching forecasts, as reported by Statistics Canada.
Money markets anticipate another 25 basis point cut at the Bank of Canada’s next rate announcement on September 4, with nearly three more cuts expected by the end of the year. This would likely bring the benchmark rate down to 3.75% by year-end.
Most economists share a similar outlook for rate reductions through the rest of the year. Andrew Grantham, senior economist at CIBC Capital Markets, stated, “With inflationary pressures fading but concerns about the weakening labor market growing, we continue to forecast three further 25bp cuts by the Bank of Canada at the remaining meetings this year.”
The Bank of Canada has trimmed its policy rate at its last two consecutive meetings, reducing it from 5% to 4.5%. In its most recent monetary policy announcement, the central bank shifted its focus from solely suppressing inflation to also supporting economic growth.
The current inflation rate is now the closest it has been to the Bank of Canada’s 2% target since March 2021, when inflation was at 2.2% as prices began to rise roughly a year into the coronavirus pandemic.
The Canadian dollar trimmed some of its gains following the CPI report, with the local currency trading up by 0.04% to 1.3628 against the U.S. dollar, or 73.38 U.S. cents. Meanwhile, bond yields for two-year Canadian government bonds dropped by 3.5 basis points to 3.416%.
Two of the Bank of Canada’s preferred measures of underlying inflation—CPI-median and CPI-trim—slowed to their weakest levels since April 2021. CPI-median decreased to 2.4% from 2.6% in June, while CPI-trim eased to 2.7% from 2.8%.
The slowdown in headline inflation in July was primarily due to lower prices for travel tours, passenger vehicles, and electricity, according to the statistics agency.
Among the key factors contributing to this deceleration, travel tour prices fell by 2.8% annually in July, following a 7.4% increase in the previous month. Passenger vehicle prices also dropped, marking the fastest decline since November 2012.
While goods prices increased by 0.3% annually, consistent with June’s figure, services inflation slowed to 4.4% from 4.8%.
