Canada inflation cools to 40-month low of 2.5% in July

9:16 am Tuesday, August 20th, 2024

By Promit Mukherjee and Ismail Shakil

OTTAWA (Reuters) -Canada’s annual inflation rate cooled to a 40-month low of 2.5% in July, matching forecasts, and core inflation measures eased as well, data showed on Tuesday, keeping the Bank of Canada on track to cut interest rates again in September.

Analysts polled by Reuters had forecast inflation to cool to 2.5% from 2.7% in June. The consumer price index was up 0.4% on a monthly basis, also in line with forecasts, Statistics Canada data showed.

Money markets expect another 25 basis point cut at the bank’s next rate announcement on Sept. 4 and are nearly pricing in a total of three more cuts this year.

Most economists are also factoring in a similar rate reduction trajectory for the rest of the year, which would bring down the benchmark rate to 3.75% by year-end.

“With inflationary pressures fading away 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,” said Andrew Grantham, senior economist at CIBC Capital Markets.

The central bank trimmed its policy rate at its last two consecutive meetings, bringing it down to 4.5% from 5% before the first cut. But at its monetary policy announcement last month, it pivoted from the narrative of only trying to suppress inflation to also boosting the economy.

The inflation rate is now the closest to the Canadian central bank’s 2% target since 2.2% inflation in March 2021, when prices were beginning to rise after about a year into the coronavirus pandemic.

The Canadian dollar pared some gains after the CPI report with the local currency trading up 0.04% to 1.3628 against the U.S. dollar, or 73.38 U.S. cents. Bond yields for the two-year Canadian government bonds fell 3.5 basis points to 3.416%.

Two of the Bank of Canada’s preferred measures of underlying inflation – CPI-median and CPI-trim – eased to their slowest pace since April 2021. CPI-median slowed to 2.4% from 2.6% in June, while CPI-trim cooled to 2.7% from 2.8%.

The slowdown in headline inflation in July was largely driven by lower prices for travel tours, passenger vehicles and electricity, the statistics agency said.

The slowdown in headline inflation in July was largely driven by lower prices for travel tours, passenger vehicles and electricity, the statistics agency said.

Among the main drivers of deceleration in inflation, prices for travel tours fell 2.8% on an annual basis in July after a 7.4% increase in the month earlier. Passenger vehicles also got cheaper in the month, as prices fell at the fastest rate since November 2012.

Goods prices rose 0.3% annually – same as June – while services inflation slowed to 4.4% from 4.8%.

(Reporting by Ismail Shakil and Dale Smith in OttawaAdditional reporting by Promit MukherjeeEditing by Nick Zieminski)