Headline CPI inflation edged lower in August to 2.0% year-on-year (y/y), versus 2.5% y/y in July, and just below consensus expectations of 2.1% y/y.
Goods prices have fallen into deflation at -0.7% y/y, with gasoline prices down 5.1% y/y. Additionally, Statcan noted greater discounting on clothing and footwear during the back-to-school shopping period.
Services prices were up 4.3% y/y, only down one tenth from July, as Canadians continue to pay up for shelter costs. Rent prices are growing 8.9% y/y, while mortgage interest costs are growing 18.8% y/y.
The Bank of Canada’s preferred “core” inflation measures decelerated to 2.4% y/y in August, down from 2.5% y/y in July. On a three-month annualized basis, the average moved from 2.8% in July to 2.4% in August.
Key Implications
Bullseye! Headline inflation is back at the Bank of Canada’s 2.0% target. At the same time, core measures keep grinding lower. These figures would be even lower if it weren’t for the outsized impact of high housing costs. Inflation excluding shelter is growing at a paltry 0.5% y/y! This exemplifies how still high interest rates have weighed on the Canadian economy and slowed the pace of growth.
Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate. We calculate that the current policy rate is still nearly 200 basis points above where it should be based on the current state of the economy. And that is after 75 bps in cuts over the last few months. No wonder odds of larger 50 basis point cuts are growing in futures markets. Over the next few weeks, we will be getting a number of BoC members speaking on the economy. This will provide the central bank plenty of opportunity to move market pricing towards its intended path.
