Economists foresee flat month-over-month inflation in August as gasoline prices pull back
Economists expect Canada’s annual inflation rate for August to drop to its lowest level since March 2021, according to BNN Bloomberg.
Statistics Canada is set to release the consumer price index on Tuesday, and economists polled by Reuters anticipate a 2.1 percent increase in prices compared to the previous year.
This would be a decline from the 2.5 percent rise recorded in July. On a month-to-month basis, inflation is expected to remain unchanged.
BMO’s chief economist, Douglas Porter, noted, “Unless there’s something lurking out there that we’re not aware of, it looks like we’re headed for a pretty favourable reading.”
RBC economists Nathan Janzen and Claire Fan explained that if the forecast holds, the inflation rate would sit just above the Bank of Canada’s two percent target.
“Most of that August slowing is expected from a pullback in gasoline prices, but the (Bank of Canada’s) preferred core CPI measures are also expected to trend lower, with the closely watched three-month annualized growth rate easing from an average of 2.6 percent in July,” they stated in a report last week.
The Bank of Canada has indicated that further rate cuts may be possible if inflation continues to slow. Earlier this month, the central bank reduced its key lending rate by a quarter-percentage point to 4.25 percent. This marks the third consecutive rate cut.
Bank of Canada Governor Tiff Macklem explained that the decision was driven by falling inflation and stated, “If the CPI moving forward was significantly weaker than we expected ... it could be appropriate to take a bigger step, something bigger than 25 basis points.”
However, Macklem also emphasized that if inflation proves stronger than anticipated, the bank could reduce the pace of rate cuts.
Inflation has remained below three percent since January, and concerns over a resurgence of price growth have diminished as economic conditions have weakened. Despite this, Porter suggested that inflation is still “not in a place where it’s a compelling argument that the bank has to go even faster.”
He forecasts that the Bank of Canada will continue cutting its key lending rate by a quarter-percentage point at each meeting until July 2025, bringing it down to 2.5 percent.
His prediction follows data released last week showing an increase in Canada’s unemployment rate from 6.4 percent in July to 6.6 percent in August. Porter acknowledged that the central bank could accelerate its rate cuts if inflation eases further.
“If we’re going to be wrong, it’s that we’re going to get to 2.5 percent even more quickly and possibly lower than that,” Porter remarked. He also pointed out that if the economy weakens further, the Bank of Canada may push rates below what it considers to be the neutral zone.
Housing costs remain the primary driver of inflation, with Canadians continuing to face high rent and mortgage payments. Porter noted that when excluding shelter costs, inflation in both Canada and the US is slightly above one percent.
“So really, the only thing keeping Canadian inflation above two percent is shelter, and it does look like shelter costs are probably going to fade,” he said.
He observed that while rents may not be falling, they are rising at a slower rate. With interest rates decreasing, mortgage interest costs are also expected to decline.
Meanwhile, the US Federal Reserve is set to meet on Wednesday, and Janzen and Fan expect the central bank to announce its first rate cut in four years.
In their report, they wrote, “Gradual but persistent labour market softening and slowing inflation make it clear that current high interest rates are no longer needed.”
They anticipate that Federal Reserve Chair Jerome Powell will likely indicate potential future rate cuts without committing to a specific timeline, allowing flexibility in future decisions.
