Canada’s inflation rate edged up slightly in August but came in lower than economists had forecasted, solidifying expectations that the Bank of Canada will cut interest rates on Wednesday.
Statistics Canada reported on Tuesday that the annual inflation rate rose to 1.9 per cent in August, up from 1.7 per cent in July. The acceleration in headline inflation was driven by a smaller annual decrease in gasoline prices in August, relative to July.
The softer-than-expected report will likely be met with a sigh of relief from the Bank of Canada’s governing council, which is set to deliver its interest rate decision Wednesday morning. Economists widely expect the central bank will step in to stimulate economic growth with its first interest rate cut in six months.
CIBC senior economist Andrew Grantham said “inflation remains unthreatening,” noting that core measures of inflation, which gauge underlying price pressures, have decelerated slightly.
“So all in all, really, this is not an obstacle for the Bank of Canada to cut interest rates tomorrow, and we continue to forecast a 25-basis-point move,” he said in an interview.
Traders now see about a 93-per-cent chance of a quarter-percentage-point cut on Wednesday, up from about 87 per cent prior to the inflation report, according to LSEG data.
The Bank of Canada’s key measures of core inflation continued to hover around three per cent last month. Meanwhile, inflation excluding gasoline prices rose by 2.4 per cent, down slightly from the previous three months.
The Bank of Canada’s key interest rate currently stands at 2.75 per cent. Mr. Grantham expects the central bank to deliver another interest rate cut in October, as well, which would bring the key interest rate down further to 2.25 per cent.
How the latest inflation report has shifted market and economist predictions for BoC rate cuts
The Bank of Canada has held off on cutting interest rates since March, opting to monitor how the U.S. trade war evolves and whether inflation remains at bay.
Economists were somewhat concerned by a pick-up in inflation in the spring and the prospect of a trade war further increasing prices. But those anxieties have faded as data come in milder than expected.
Mr. Grantham said that in hindsight, the pick-up in inflation in the spring was being driven by the retaliatory tariffs that Canada placed on U.S. goods, which affected food products in particular.
Prime Minister Mark Carney dropped many of Canada’s retaliatory tariffs this month in a bid to further trade negotiations with the U.S. The move was applauded by Canadian businesses who said the countermeasures were raising prices for consumers.
“It’s very difficult to make the case that underlying inflationary pressures are anything but weak at the moment,” said Royce Mendes, managing director and head of macro strategy at Desjardins.
“That’s even more true given the fact that Canada’s retaliatory tariffs have mostly been eliminated,” he added. “So, any price increases that were due to those tariffs are likely to normalize, and in some cases, we could even see price declines in some categories.”
Rob Carrick: Want to make people more anxious about their finances? Cut interest rates
Economists say the Bank of Canada’s focus now needs to shift to supporting the economy, which has stalled under the weight of U.S. tariffs.
A sharp decline in Canadian exports to the U.S. caused the economy to shrink in the second quarter, with real gross domestic product declining by 1.6 per cent on an annualized basis. The slowdown has also reached the labour market, where the unemployment rate has been rising steadily in recent months, reaching 7.1 per cent in August.
Mr. Mendes said the growing slack in the job market suggests the impact of tariffs is spreading beyond the strategic sectors that the U.S. has targeted.
“The bank has an obligation to step in and support the economy, and keep inflation from actually falling too far below its 2 per cent target,” Mr. Mendes said.
While headline inflation remained around the Bank of Canada’s two-per-cent target, Canadians continued to see the cost of food and shelter rise faster than overall price growth last month.
Food prices rose by 3.4 per cent, compared with 3.3 per cent in July. Shelter costs increased at a slower pace of 2.6 per cent, down from 3 per cent the previous month.
With a report from Darcy Keith