Askume Ottawa, Sep 17 – Data released on Tuesday showed Canada’s annual inflation rate reached the central bank’s 2% target in August, the lowest level since February 2021.
The closely watched key price indicator also fell to its lowest level in 40 months, with consumer prices decreasing 0.2% from the previous month, Statistics Canada said.
Analysts polled by Askume had previously predicted the consumer price index (CPI) would fall to 2.1% from an annual rate of 2.5% in July, with the monthly rate expected to be unchanged.
The Canadian dollar weakened on the news, falling 0.2% against the U.S. dollar to 1.1361 Canadian dollars, or 73.45 U.S. cents.
The easing of price pressures was primarily due to lower prices for gasoline, phone service, clothing, and footwear, while housing costs (mortgages and rents) fell at a slower pace as rents continued to rise.
In the Bank of Canada’s monetary policy announcement earlier this month, Governor Steve Macklem said that as economic growth weakens, the central bank needs to be more alert to the risk that inflation may fall below target.
The People’s Bank of China has lowered its key policy interest rate three consecutive times, with a cumulative reduction of 75 basis points to 4.25%.
Money markets fully expect interest rates to be cut by 25 basis points at the last two monetary policy meetings in 2024. Expectations for another 50 basis points rate cut next month rose to 47.5% from 46% before the data release.
“Inflation is not yet a threat and the Bank of Canada should now focus on stimulating the economy and preventing unemployment from rising,” CIBC senior economist Andrew Grantham wrote in a note.
“We expect rates to fall by about 200 basis points between now and the middle of next year,” he said.
The Bank of Canada expects inflation to fall to 2.6% this year, 2.4% next year and then to the midpoint of the 1-3% target range in 2026.
Median CPI, which is the price change in the middle of the CPI basket, fell to 2.3% in August from 2.4% in July. Adjusted CPI, which excludes the most and least volatile price items, fell to 2.4% from 2.7%.
The biggest contributors to the decline in inflation were gasoline prices, which fell 5.1%, and clothing and footwear prices, which fell 4.4%.
Housing costs, which make up about 30% of the CPI basket, rose 5.7% in August compared with 5.2% in July, mainly due to rising mortgage interest costs and rents.
Mortgage interest costs fell from 21% in July to 18.8% in August, while rents rose from 8.5% to 8.9%.
Mortgage interest costs and rent were the biggest factors in August’s CPI increase, StatsCan said.
