Canada’s Inflation Rate Drops to 2.5%, Setting the Stage for Potential Interest Rate Decrease

Canada’s annual inflation rate dropped to 2.5 percent last month, in line with economists’ predictions and reinforcing expectations for another interest rate cut in September.

The consumer price index report released on Tuesday highlighted that prices for travel tours, passenger vehicles, and electricity were key factors contributing to the decrease in the headline figure.

While shelter costs continue to be a significant driver of inflation due to higher rents and mortgage payments, the growth in shelter prices slowed to 5.7 percent year-over-year, down from 6.2 percent in June.

Inflation has remained below three percent since January and has been gradually decreasing, showcasing progress in combating high inflation.

Senior economist Andrew DiCapua from the Canadian Chamber of Commerce emphasized, “There’s still work to be done to achieve price stability as Canadians feel the financial strain and cut back on spending.”

Global supply chains improving and the impact of higher interest rates have contributed to slowing price growth across various sectors of the economy.

While grocery prices previously experienced double-digit annual growth, the rate has now moderated, with a 2.1 percent increase from last year recorded in the latest report.

Furthermore, prices for items like clothing and footwear have actually decreased compared to a year ago.

Despite earlier concerns of a housing market surge following interest rate cuts, the market has remained subdued.

Nevertheless, certain sectors, particularly those related to services, continue to face price pressures, with services prices rising by 4.4 percent year-over-year due to significant wage growth.

With overall price growth slowing down, analysts widely anticipate the Bank of Canada to proceed with consecutive interest rate cuts.

Governor Tiff Macklem has indicated the central bank’s increasing worry about maintaining interest rates at a high level for an extended period.

At the last rate announcement, the governing council opted to reduce the policy rate to stimulate economic growth.

The current key interest rate stands at 4.5 percent.

The Bank of Canada is scheduled to announce its next rate decision on September 4, which will also take into consideration second-quarter GDP data released at the end of the month.

While most analysts forecast a quarter-percentage point rate cut in September, RBC economist Claire Fan suggested that a weaker-than-expected GDP figure could prompt a half-percentage point reduction.

“If economic conditions deteriorate faster than anticipated, a quicker rate cut could be warranted,” Fan remarked.

According to the latest projections, the central bank expects the economy to have grown at a 1.5 percent annualized rate between April and June.