1) (Updated) Canada’s inflation rate falls to 2.5%, paving way for another interest rate cut

Courtesy Barrie360.com and Canadian Press

By Nojoud Al Mallees, Updated August 20, 2024

Statistics Canada published its July consumer price index report today.

Canada’s annual inflation rate fell to 2.5 per cent last month, matching economists’ forecasts and solidifying expectations for a third consecutive interest rate cut in September.

Tuesday’s consumer price index report saysprices for travel tours, passenger vehicles and electricity helped drive the headline figure lower.

Meanwhile, shelter costs are still the main driver of inflation as Canadians face significantly higher rents and mortgage payments.

The federal agency noted, however, that shelter price growth slowed last month to 5.7 per cent year-over-year, down from 6.2 per cent in June.

Inflation has remained below three per cent since January and fears of inflation reaccelerating have diminished as the economy has weakened.

“There’s more to go in terms of reaching price stability as Canadians feel the pinch and pull back on spending,” wrote Andrew DiCapua, senior economist at the Canadian Chamber of Commerce.

“But we think the Bank of Canada will continue their path of interest rate cuts and move again in September, prioritizing economic growth as inflation moderates.”

In the United States, year-over-year inflation reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the U.S. Federal Reserve for a rate cut in September.

The annual U.S. inflation rate now stands at 2.9 per cent.

Improvement in global supply chains and the effect of high interest rates have helped cool price growth across the Canadian economy.

Grocery prices, which at one point were growing at a double-digit annual rate, are now rising at a much more modest pace. Last month, grocery prices were up 2.1 per cent from a year ago.

Prices for many goods, such as clothing and footwear, have outright fallen compared with a year ago.

And the housing market has remained relatively muted, despite fears earlier this year that interest rate cuts could spur a flurry of activity.

However, some price pressures persist, particularly in services-producing sectors.

Prices for services were up 4.4 per cent from a year ago, a trend that economists say reflects high wage growth.

Nevertheless, with the backdrop of slowing price growth overall, forecasters are widely expecting the Bank of Canada to continue cutting interest rates at back-to-back meetings.

Governor Tiff Macklem has signalled that the central bank is increasingly concerned about the risk of keeping interest rates too high for too long.

The Bank of Canada has been paying closer attention to the slowdown in the labour market as it adjusts monetary policy. Labour shortages have decreased significantly and the unemployment rate has risen steadily, reaching 6.4 per cent in July.

At the last interest rate announcement, Macklem said the governing council decided to lower its policy rate, in part to help the economy pick up speed again.

Its key interest rate now stands at 4.5 per cent.

The central bank is scheduled to hold its next interest rate announcement on Sept. 4.

In addition to the latest inflation figures, the central bank will have second quarter gross domestic product data to consider at the end of the month. 

While most forecasters expect the central bank to cut its key rate by a quarter-percentage point in September, RBC economist Claire Fan said a weaker-than-expected GDP print could prompt the central bank to cut by a half-percentage point instead.

“Should it be that economic conditions were to deteriorate faster than they were anticipating, I think it’s fully reasonable to think that they could (cut) at a faster pace,” Fan said. 

According to its latest forecasts, the central bank expects the economy grew at an annualized rate of 1.5 per cent between April and June. 

2) Economists expect July inflation data to set the stage for more rate cuts

Courtesy Barrie360.com and Canadian Press

By Nojoud Al Mallees, August 19, 2024

Canada’s inflation rate likely took another dip last month, according to economists who expect the Bank of Canada to continue cutting interest rates throughout the fall. 

Statistics Canada is set to publish its July consumer price index report on Tuesday and forecasters expect it will show inflation slowed to 2.4 per centfrom 2.7 per cent in June.

James Orlando, TD director of economics, says despite upward pressure from gasoline and food prices, he still expects the annual rate to fall because of base-year effects, which refer to how price movement from a year ago affects the calculation of overall inflation. 

“This is occurring on the back of really strong unwinding of base (year) effects from last July, where inflation went up quite significantly,” he said.

The marked slowdown in price growth this year has boosted confidence among economists and the Bank of Canada that inflation will continue to ease in the coming months, giving the central bank the greenlight to continue cutting its benchmark interest rate. 

“We’d have to see something very different from what we’ve been seeing in this inflation reading to take any sort of rate cut in September off the table,” said Tiago Figueiredo, a macro strategist at Desjardins.

He says Desjardins expects the annual inflation rate fell to 2.5 per cent in July.

The Bank of Canada, which has lowered its key interest rate at its last two meetings, has signalled it will continue cutting rates, as long as price growth continues to ease. 

The central bank’s shift to rate cuts comes amid a sputtering economy as businesses and consumers pull back on spending.

Meanwhile, a chill has hit the labour market, pushing up the unemployment rate to 6.4 per cent in July.

Governor Tiff Macklem said at the Bank of Canada’s last rate decision announcement that as inflation edges closer to its two per cent target, the central bank is increasingly considering the risks associated with keeping interest rates high for too long.

“That need for growth to pick up was something that was part of our decision to cut the policy interest rate today,” Macklem said at the post-meeting press conference on July 24. 

Forecasters are now widely expecting the central bank to lower its policy rate at every rate meeting this year. Assuming the bank cuts by a quarter point at each meeting, it would bring its key interest rate down to 3.75 per cent. 

“There’s really not much in the economy that’s making us think that inflation is going to pick up again right now. So I think it just reinforces the expectation of rate cuts continuing at this meeting-by-meeting pace of 25 basis point cuts,” Orlando said.

The annual inflation rate has remained within the Bank of Canada’s one to three per cent target since January, a welcome development after a historic rise in price growth.

The bank is forecasting inflation will return to the two per cent target next year. 

Slowing inflation in Canada has been part of a larger global trend that’s allowing central banks to cut or think about cutting interest rates.

In the United States, year-over-year inflation reached its lowest level in more than three years in July, the latest sign that the worst price spike in four decades is fading and setting up the U.S. Federal Reserve for a rate cut in September.

The annual U.S. inflation rate now stands at 2.9 per cent. 

The European Central Bank began lowering its policy rate in June and the Bank of England delivered its first rate cut earlier this month.