Canada's inflation rose to 1.9% in August, but a rate cut remains likely
Canada’s annual inflation rate climbed to 1.9% in August, but the smaller-than-expected increase is unlikely to prevent the Bank of Canada from lowering rates at its next meeting.
The latest data, released right before the rate decision, showed that most core price pressures kept easing even as the overall inflation rate ticked up.
The consumer price index rose in August from a year earlier, compared to 1.7% in July, in an uptick was mainly due to gas prices, which kept dropping but not as quickly as before.
Without gas, inflation slowed to 2.4% in August, down from 2.5% over the previous three months. Month over month, the CPI fell by 0.1%, surprising economists who expected it to hold steady.
Core inflation measures ease, but some pressures persist
Most key inflation measures tracked by the BoC edged lower. The average of the BoC’s two main core inflation metrics slipped to 3.05% from 3.1% in July, while their three-month average stayed at 2.52%. Shelter inflation eased to 2.6%, and inflation excluding food and energy dropped to 2.4%. However, the portion of CPI items rising more than 3% grew to 39.1% in August from 37.3% in July, showing that some price pressures persisted.
"Overall, this should give the BoC a bit more confidence that underlying inflationary pressures are reasonably contained," said Michael Davenport, senior Canada economist at Oxford Economics.
Labour market weakness strengthens case for a cut
Economic headwinds have strengthened the case for a rate cut. Canada’s labour market weakened sharply, with 100,000 jobs lost over July and August, pushing the unemployment rate to 7.1%, the highest level outside of the pandemic in nearly a decade. Second-quarter GDP contracted at a 1.6% annualized pace, the sharpest decline since the pandemic.
Provincially, eight out of ten provinces saw faster year-over-year price increases in August. "With the economy teetering on the verge of recession and labour market slack building, we expect the Bank of Canada will lower rates by 25bps tomorrow followed by a second similarly-sized cut in October," said Davenport.
The BoC has held its key rate at 2.75% for three straight meetings, despite trade tensions with the US and ongoing inflation concerns. With inflation still under the 2% target and the economy showing more signs of weakness, a rate cut now looks likely.
