Canada’s annual inflation rate fell for the second consecutive month in August, a sign that the Bank of Canada’s campaign to curb price growth through much higher lending rates is having its intended effect.
The consumer price index (CPI) rose 7 percent in August from a year earlier, Statistics Canada said in a report on Tuesday. That was lower than financial analysts’ estimate of 7.3 percent. Inflation has declined from 7.6 percent in July and 8.1 percent in June, which was high for nearly four decades.
Prices fell 0.3 percent in August compared to July, more than analysts had expected. Gasoline prices, which fell 9.6 percent over the month, were the main driver of lower inflation. But consumers did not only find relief at the pumps.
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Reception costs fell on a monthly basis for the first time since January 2021, helped by a modest rent decline. Clothing and footwear prices also fell. In turn, the average of the Bank of Canada’s key annual inflation measures — which omit volatile aspects of the CPI and better reflect underlying inflation trends — fell from 5.4 percent in July to 5 percent in August. 2 percent.
“Is this too good to be true? We’ve seen fakes in the numbers before, with recent US inflation data being a prime example,” Royce Mendes, chief of macro strategy at Desjardins Securities, told clients. “However, it could be true that easing supply chain pressures, falling commodity prices and a highly interest rate sensitive economy are all conspiring to cool price growth in Canada over other jurisdictions,” such as the United States.
However, there were some discouraging signs. Supermarket prices rose 10.8 percent year-on-year, the fastest pace in more than 40 years. And the Bank of Canada was quick to point out that 7 percent inflation is too high for comfort.
“While we’re on the right track, that’s still too high,” Paul Beaudry, deputy governor of the Bank of Canada, said in a speech at the University of Waterloo on Tuesday.
“We will continue to take all measures necessary to restore price stability for households and businesses and to maintain Canadian confidence that we can deliver on our mandate to bring inflation down to 2 percent.”
Two weeks ago, the Bank of Canada raised its key rate by 75 basis points to 3.25 percent, as part of an aggressive growth cycle that began in March when interest rates were at a pandemic low of 0.25 percent. (A basis point is 1/100th of a percentage point.) Despite a slower rate of inflation recently, analysts expect the central bank to raise again at its meeting in late October.
“We’re seeing good trends” in inflation, Claire Fan, an economist at the Royal Bank of Canada, said in an interview. But “with core inflation still so high that it is falling permanently and fast enough to 2 percent, central banks have no choice but to raise more,” she added. Ms Fan expects a key interest rate of 4 percent by the end of the year.
The US Federal Reserve will announce its next interest rate decision on Wednesday. Analysts expect the Fed to raise its target for the Federal Funds rate by 75 basis points, to a range of 3 percent to 3.25 percent.
Inflation proves difficult to tame in the US The country reported last week that annual inflation had fallen to 8.3 percent. But core inflation – excluding food and energy – accelerated on a monthly basis. That led to a sell-off in the stock market on fears of a recession due to higher interest rates.
Canada’s inflation rates are likely to be moderated again by gasoline in September. On Monday, the national average price of regular unleaded gas was 155.4 cents per liter, down 9.5 percent from the August daily average, according to data from Kalibrate Technologies.
What has not improved is the supermarket prices. In the past 12 months, meat prices have increased by 6.5 percent, bakery products by 15.4 percent, fresh fruit by 13.2 percent and pasta products by 20.7 percent. “Food supply continued to be impacted by multiple factors, including extreme weather, higher input costs, the Russian invasion of Ukraine and supply chain disruptions,” Statscan said in Tuesday’s report.
Another persistent problem is that wages are still lagging behind inflation. Average hourly wages rose 5.4 percent in August from a year earlier, as part of a prolonged erosion in Canadian purchasing power.
Statscan noted that price growth is slowing for durable goods, which were a big area of consumer demand during the pandemic as people diverted spending away from services. Home appliance prices rose 9 percent year-on-year, from 11.5% in July, with Statscan citing “decreased consumer demand.”
Ms Fan expects consumer spending to decline further as households face higher debt service costs. “It will really put a strain on their incomes and start having more of an impact,” she said.
On Monday, Statscan reported that prices of industrial products and raw materials fell for the third consecutive month in August, including energy and petroleum products, fertilizers and softwood.
“It takes time for those to flow through the supply chain and production layers to reach consumers with lower prices,” said Ms Fan. “But we do expect this to come, at least for trade goods.”