Economists predict that the annualized inflation rate will reach its lowest level since March 2021.
According to economists consulted by Reuters, the increase in the Consumer Price Index (CPI) was limited to 2.1% in August compared to the same period in 2023. In July, this index had risen to 2.5%.
Statistics Canada is scheduled to release its monthly report on the CPI, an indicator of changes in consumer prices paid by Canadians, for the month of August on Tuesday.
Economists predict there will be no variation on a monthly basis.
Unless something unforeseen is lurking in the shadows, it appears we are headed toward favorable data.
Douglas Porter, BMO’s chief economist and managing director
RBC economists Nathan Janzen and Claire Fan said in an analysis last week that if those forecasts are correct, the inflation rate would be just above the Bank of Canada’s 2% target.
“Part of the slowdown in August is due to gasoline prices, but measures of core inflation – a favorite of the Bank of Canada – are also expected to trend lower,” they wrote.
In July, this rate was on average 2.6% in July.
The continued slowdown in inflation comes at a time when the central bank is giving signs of wanting to accelerate the reduction of its key rate if conditions allow.
The Bank of Canada cut its key interest rate by a quarter point earlier this month, the third straight cut to 4.25 per cent. Governor Tiff Macklem said the decision was driven by falling inflation, noting that the CPI was significantly weaker than expected. “It may be appropriate to take a bigger step forward and decide to cut more than 25 basis points,” he said.
PHOTO JUSTIN TANG, CANADIAN PRESS ARCHIVES
Tiff Macklem, Governor of the Bank of Canada
Mr. Macklem warned, however, that if inflation accelerated again, the Bank of Canada could slow the downward movement of its key rate.
Inflation has been below 3% since January. Fears of increased price pressure have diminished as the economy has slowed.
Porter said the CPI is not yet low enough to convince the Bank of Canada to move more quickly to cut rates.
It predicts the central bank will cut its benchmark interest rate by a quarter of a percentage point at each of its monthly policy meetings through July 2025, bringing it to 2.5%. The forecast comes after the unemployment rate rose 0.2 percentage points to 6.6 in August.
“And if we’re wrong, it’s because we’ll be at 2.5 per cent faster. It could be even lower than that,” Porter said. “You could argue that if the economy weakens further, there’s little reason for the Bank of Canada to keep its policy rate in neutral territory. They could lower it even further.”
Housing prices remain the main source of inflation in the country. Mr. Porter notes that if this is not taken into account, inflation would be barely above 1% in Canada and the United States.
“So the only thing keeping Canadian inflation from falling below 2% is housing prices. And all the signs are that even that is likely to come down. Rents seem to be moderating. They’re not falling, but they’re not rising as fast. And as interest rates come down, mortgages are going to come down as well.”
The U.S. Federal Reserve is scheduled to meet on Wednesday. Mr. Janzen and Mr.me Fan predicts that the U.S. central bank will announce its first rate cut in four years.
“A gradual but steady slowdown in the labor market and declining inflation are signs that high interest rates are no longer needed,” they wrote. “We expect Governor Jerome Powell to remain cautious in his comments while hinting at future cuts without committing to a predetermined path in order to have more flexibility in future decisions.”
With the collaboration of Nojoud Al Mallees in Ottawa