The annual inflation rate fell from 2.5% in July to the lowest level since February 2021.
What is causing the current rate of inflation?
Statistics Canada’s consumer price index report on Tuesday revealed that the rate of decline in fuel prices is slowing. Clothing and footwear prices also fell on a monthly basis, marking the first drop in August since 1971 as retailers offered deep discounts to lure shoppers amid sluggish demand.
Will inflation affect interest rates and lead to rate cuts?
The Bank of Canada’s key inflation measures, which gauge inflation, also fell in August. The sharp drop in inflation last month was steeper than forecasters had expected for a 2.1% annual increase ahead of Tuesday’s release and may have fueled speculation of a big interest rate cut next month from the Bank of Canada.
“Inflation remains a threat and the Bank of Canada must now focus on trying to stimulate the economy and halt rising unemployment,” wrote CIBC chief economist Andrew Grantham.
Benjamin Reitzes, managing director of Canadian rates and chief strategist at BMO, said Tuesday’s data “tips the scale” slightly in favor of aggressive tapering, though he noted that the Bank of Canada will have more readings on inflation ahead of the October rate announcement. “If we get another big negative surprise, calls for a 50-point break will increase significantly,” Reitzes wrote in a client note.
The central bank began raising interest rates quickly in March 2022 due to inflation, which rose 8.1% that summer. The central bank raised the key lending rate to 5% and kept it at that level until June 2024, when it introduced its first reduction in four years. A combination of restored global supply chains and high interest rates have helped moderate price growth in Canada and around the world.
Bank of Canada governor Tiff Macklem recently signaled that the central bank is ready to increase the size of interest rate cuts, if inflation or the economy slows down more than expected. Its prime lending rate currently stands at 4.25%. CIBC predicts that the central bank will cut its key rate by two percentage points between now and the middle of next year. The US Federal Reserve is also expected on Wednesday to deliver its first interest rate cut in four years.
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