Inflation Falls, Boosting Hopes for a September Rate Cut

The most recent consumer price index report highlights that reductions in costs for travel, vehicles, and electricity have contributed to this decrease. Despite these improvements, shelter costs remain a significant inflation driver, with higher rents and mortgage payments continuing to exert upward pressure on prices. However, the growth in shelter costs has moderated, decreasing from 6.2 per cent in June to 5.7 per cent last month.

Since January, inflation has consistently stayed below three per cent, marking a notable reduction from previous high levels. This steady decline underscores the progress made in addressing inflationary pressures, although experts recognize that more work is needed to achieve full price stability. Senior economists emphasize that while overall inflation has softened, Canadians are still feeling economic strain, leading to reduced consumer spending.

Global supply chain improvements and the effects of previous interest rate hikes have been instrumental in cooling price growth across various sectors. For instance, grocery prices, which once surged at double-digit rates, have moderated to a 2.1 per cent increase from the previous year. Additionally, prices for certain items, like clothing and footwear, have even decreased compared to last year. Despite concerns earlier this year that interest rate cuts might ignite a surge in housing market activity, the market has remained relatively subdued.

Nevertheless, some sectors are still experiencing price pressures. Services have seen a 4.4 per cent increase in prices year-over-year, a trend attributed to rising wages in these industries. This persistent inflation in the services sector contrasts with the broader trend of declining price growth, contributing to the expectation that the Bank of Canada will continue its policy of interest rate reductions.

Bank of Canada Governor Tiff Macklem has indicated a growing concern about the risks associated with maintaining high interest rates for extended periods. During the last rate announcement, Macklem noted that the decision to lower the policy rate aimed to stimulate economic activity and address slower growth. Currently, the key interest rate stands at 4.5 per cent, and the central bank is scheduled to make its next rate decision on September 4.

In addition to the latest inflation data, the central bank will also review second-quarter gross domestic product (GDP) figures at the end of the month. While most forecasts suggest a modest rate cut of a quarter-percentage point, RBC economist Claire Fan notes that a weaker-than-expected GDP report could lead the Bank of Canada to opt for a more substantial cut of half a percentage point. According to current forecasts, the Canadian economy grew at an annualized rate of 1.5 per cent between April and June, highlighting the complex interplay of factors influencing monetary policy decisions.

 

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