Canadian CPI lowers to 2% in August
Inflation has officially hit the Bank of Canada’s target. Here’s what borrowers should know.
Penelope Graham, Director of Content
Canadian inflation is officially right on target. The August Consumer Price Index (CPI) report from Statistics Canada reveals the headline measure fell to 2%, down from 2.5% in July, and slightly under the forecasted 2.1%.
This marks inflation’s slowest year-over-year growth pace since February 2021, and also signals victory for the Bank of Canada, which has been striving to pull the measure down to 2% since the end of pandemic lockdowns. As businesses opened back up, consumer prices soared due to pent-up demand and lingering supply chain issues, eventually hitting a peak of 8.1% in June 2022. Two per cent is considered a sustainable level for inflation, neither stimulating or restricting the economy.
According to StatCan, inflation was largely pulled lower by gas prices, which dropped 5.1% year over year, after rising 1.9% in July; with it stripped out, the CPI growth came in at 2.2%. Lower prices for clothing and footwear also contributed to the slowdown. On a monthly basis, inflation fell by 0.2% compared to 0.4% in July.
The “core” measures that are tracked closely by the Bank of Canada also came in at a 40-month low. The CPI Trim, which filters out extreme price movements that can be caused by specific items in the basket of goods, dropped for the fourth consecutive month, down to 2.4% from July’s 2.7%. Meanwhile, the CPI median – which measures price changes in the 50th percentile in the basket of goods – came in at 2.3% from the previous 2.4%.
Mortgage interest costs, which are the largest contributor to the CPI basket of goods, also fell for the 12th month in a row, to 18.8% from 21% in July and 22.3% in June. This reflects the cumulative effect of the Bank of Canada’s previous two rate cuts, which have lowered the cost of borrowing for many mortgage shoppers. Overall, mortgage interest costs have dropped from a peak of 30.9% in August 2023.
That also led to overall shelter inflation falling to 5.3% from the previous 5.7%, despite rents remaining elevated at 8.9%.
How will this impact the next Bank of Canada decision?
Now that the Bank of Canada’s long-awaited goal has been achieved, Canadians can expect an era of lower interest rates, as the central bank shifts its focus to supporting a slowing economy. With at least another quarter-point cut is already assured in the Bank’s upcoming October 23 announcement, the question now becomes whether that cut could be larger, or whether more cuts than anticipated could be in store down the road. Analysts will be keeping their eyes peeled for language in the Bank’s announcement that could indicate if monetary policy will need to be loosened at a quicker pace.
Broader inflation pressures look to be back around the 2% inflation target, and interest rates are still at levels high enough to restrict economic growth and push price growth lower,” write RBC economists Claire Fan and Abbey Xu in an economic note following the report’s release.
“Per-capita GDP is already down in 7 of the last 8 quarters and the unemployment rate is up more than a percent from a year ago. Against that backdrop, the path to further BoC interest rate cuts is clear. We continue to expect a gradual rate cutting path (25 basis points per meeting) down to a 3% overnight rate with risks tilted to potentially larger cuts if the economy softens significantly further.”
However, Randall Bartlett, Senior Director of Canadian Economics at Desjardins, believes today’s lower reading paves the way for a half-point decrease next month.
“All told, there was a lot to like in the August inflation report,” he writes.
“Headline inflation slowing sharply and landing right on the Bank of Canada’s 2% target, the gradual rise in the unemployment rate and slowing pace of economic growth suggest high interest rates are working to cool the economy. In fact, maybe they’re working too well. As such, we think the BoC is likely to cut the policy rate by 50-basis points at its October announcement.”
What this means for mortgage borrowers
Bank of Canada rate cuts will further lower variable mortgage rates, which are priced based on lenders’ prime rates, and, by extension, the central bank’s Overnight Lending Rate. Following the most recent quarter-point rate cut on September 4, that rate is now 4.25%, down a cumulative 75 basis points from its previous high of 5%.
Today’s inflation report also bodes well for fixed mortgage rate borrowers, as five-year bond yields have lowered to the 2.7% range, both on expectations of today’s CPI report, and an expected rate cut from the US Federal Reserve on Wednesday (following a similarly promising US CPI report this month). That’ll give lenders additional runway to cut their fixed mortgage rate options further, as they already have in recent weeks; currently, the lowest five-year fixed option in Canada is 4.09%.