Consumer price inflation took another small step in the right direction in August, easing to 7.0% year-on-year (y/y), down from 7.6% in July.
Lower gasoline prices helped cool inflation once again, falling 9.6% on the month – the largest monthly decline since April 2020. However, gasoline prices are still 22% higher than a year ago.
The easing in the pace of inflation wasn’t entirely energy, with CPI ex-energy cooling to 6.3% y/y in August, down from 6.6% y/y in July. This was helped by a slowing in services prices to 5.5% y/y from 5.7% in July.
Unfortunately, food prices remained stubbornly high. Food purchased from stores cost 10.8% more than a year ago – the fastest pace since 1981.
Durable goods inflation took a step back to 6% y/y in August, down from 7% in July, as consumer demand eased for things like appliances. Vehicle prices are still up 7.3% y/y, although that is down from an 8.2% y/y pace in July.
The Bank of Canada’s core inflation metrics also cooled slightly in August. CPI-trim decelerated by 0.2 percentage points (pps) to 5.2%, CPI-common eased by 0.3 pps to 5.7%, and CPI-median cooled one tick to 4.8%. The average of the three core measures was 5.2% y/y, down two tenths from 5.4% y/y in July.
Key Implications
A journey of a thousand miles starts with a single step. Canadian inflation took a single step in the right direction in August, but it still has a long way to go. The Bank of Canada (BoC) core measures of inflation remain more than 2 pps from the target range of 1-3%. The BoC has hiked interest rates 300 basis points so far this year, and the impact of that is starting to be felt in the economy. Even still, we expect more slowing in demand, which should help bring down inflation along with it.
Still, there is a long journey ahead, and we expect the BoC to continue hiking its policy rate at the end of October, and take the policy rate to 4% by the end of the year, as outlined in our latest Quarterly Economic Forecast, released today.
