This marks the slowest growth rate since February 2021 and signals the effectiveness of the Bank’s aggressive interest rate hikes initiated in April 2022 to combat soaring inflation. Following this sustained effort, the central bank made its first rate cut since March 2020 in June, expressing increased confidence that inflation will stabilise around the two per cent mark.
The reduction in inflation can largely be attributed to a decline in gasoline prices, which are typically volatile. When gasoline is excluded from calculations, the inflation rate slightly rises to 2.2 per cent. Although this achievement might suggest relief for consumers, the reality is more complex. Many Canadians may not yet feel the benefits when shopping for everyday items like groceries, as prices remain elevated despite the slower rate of increase.
Economists emphasise that the Bank of Canada’s goal is not to revert prices to pre-pandemic levels but to stabilise inflation moving forward. For instance, if the price of a steak has doubled from $10 to $20, the expectation is that this price will not increase by more than two per cent annually from now on. This perspective highlights a crucial distinction: while inflation is under control, consumers may still encounter higher costs than they are accustomed to.
Pedro Antunes, chief economist at the Conference Board of Canada, notes the importance of maintaining low and stable inflation, especially for individuals on fixed incomes who rely on purchasing power. The Bank aims to avoid a scenario of zero per cent inflation, which can lead to deflation—an economic condition where falling prices cause consumers to delay purchases, negatively impacting overall economic activity.
In August, the largest contributors to the consumer price index were mortgage interest and rental costs, although the growth in mortgage interest rates is beginning to slow. Notably, if mortgage interest costs were excluded, the inflation rate would plummet to just 1.2 per cent year over year. Meanwhile, grocery prices saw a 2.4 per cent increase compared to the previous August, influenced by what economists describe as a base-year effect, which compares current prices with those from the same month last year.
Interestingly, clothing and footwear prices decreased during a typically active back-to-school shopping period, while electricity prices continued to rise, albeit at a slower pace.
Looking ahead, the Bank of Canada’s next interest rate meeting is scheduled for October 23. Economists speculate on the nature of potential cuts, debating whether a reduction will be 25 or 50 basis points. With inflation stabilising, the focus may soon shift towards stimulating economic growth, especially as Canadians continue to navigate the realities of higher prices in their daily lives.
Contact Accountancy Insurance
We would love to hear from you.
About Accountancy Insurance
Thousands of accounting firms offer our tax audit insurance solution, Audit Shield to their clients.
Find out why.