Canadian CPI lowers to 2.5% in July
Penelope Graham, Head of Content
Canada’s headline inflation rate fell further in July, showing progress in the Bank of Canada’s efforts to rein it back to its 2% target, and cementing the chance of another rate cut in September.
According to Statistics Canada, the Consumer Price Index's (CPI) annual growth rate fell to 2.5%, from 2.7% in June. That’s the slowest pace since March 2021, and was largely due to lower prices for travel tours, passenger vehicles and electricity.
On a seasonally adjusted monthly basis, the measure rose 0.3% compared to a 0.1% drop in June, reflecting an increase in gas prices, which rose 2.4% in July. The pace of food costs also slowed, coming in at 0.3%, compared to 0.6% the previous month, to an annual rate of 2.7%.
Lower interest rates now reflected in shelter costs
The July report also indicated that the previous two rate cuts from the Bank of Canada – which cumulatively have brought Canada’s benchmark interest rate to 4.5% from 5% – are starting to be felt by borrowers. Overall shelter inflation rose at a slower rate of 5.7% compared to 6.2% in June, with mortgage interest costs falling to 21% from 22.3%. While rent prices continue to rise year over year, StatCan noted they increased at a slower pace in July at 8.5%, compared to 8.8% in June.
Also read: Rate cuts improved home affordability across Canada in July
Further improvement to core inflation
There was also steady progress seen in the core inflation measures, which the Bank of Canada closely monitors to inform its interest rate decisions. The CPI Trim – which filters out extreme price movements that can be caused by specific items in the basket of goods – fell for the third straight month, to a pace of 2.7%, as well as marking its fourth consecutive month below 3%. The CPI median – which measures price changes in the 50th percentile in the basket of goods – came in at 2.4% from the previous 2.6%.
“Enough to quell concerns”
Combined with promising inflation numbers out this month from the United States, the July CPI report further reassures our central bank that price growth is calming as planned, without wreaking havoc in the Canadian job market and the overall economy. While another quarter-point rate cut is already largely baked for September, the July report further establishes the Bank’s cutting cycle, which analysts believe will total another three cuts this year, and more to come in 2025.
The Bank has been clear that further inflation progress will lead to more rate cuts. In the BoC’s Summary of Deliberations released earlier this month (a summary of the decision making behind the July 24th rate decrease) the central bank’s governing council said there was a “clear consensus” to slash its Overnight Lending Rate, given how core and shelter inflation had improved. Overall, the BoC expects inflation to hit its 2% target some time in 2025.
Several of Canada’s largest lenders have also recently increased their forecast for the number of rate cuts we are to receive; CIBC and TD now call for a total of 200 basis points (2% in cuts by the fourth quarter of 2025, up from their previously forecasted 1.75%), which would bring the Overnight Lending Rate down to 2.5%. The other banks’ forecasts for the target rate currently range between 3.25 - 3% by the end of next year.
“Today’s CPI print should be enough to quell concerns about sticky inflation pressures in Canada after two marginal upside surprises in May and June. Readings were unequivocally weak – with slowing evident among all core CPI measures,” write RBC economists Claire Fan and Abbey Xu, who add that inflation’s growth is now looking similar to pre-pandemic conditions in 2019.
“That’s good news for the Bank of Canada, who is actively turning their focus onto a weakening economic backdrop and the disinflationary pressures that could stem from that moving forward. The hurdle for more BoC cuts this year is low and we continue to look for another 25 basis point cut at their next meeting in September," they write.
Further cuts from the central bank will lower Canada’s prime rate, which will in turn be reflected in lower variable mortgage rates, and other banking products such as high-interest savings accounts and GICs.
The next Bank of Canada rate announcement is scheduled for September 4, 2024.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.