Canada's inflation rate falls to 2.5% in July

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OTTAWA — Canada's annual inflation rate fell to 2.5 percent last month, in line with economists' forecasts and supporting expectations for a third consecutive interest rate cut in September.

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According to Tuesday's consumer price index report, prices for travel, passenger cars and electricity contributed to the decline in the headline number.

At the same time, housing costs remain the main driver of inflation as Canadians face significantly higher rents and mortgage payments.

However, the federal agency noted that the increase in accommodation prices slowed last month compared to the same period last year and was only 5.7 percent (in June it was 6.2 percent).

Inflation has been below three percent since January and fears of a renewed rise in inflation have diminished with the economic slowdown.

“There is still a long way to go to achieve price stability as Canadians feel the impact of the crisis and cut back on spending,” wrote Andrew DiCapua, senior economist at the Canadian Chamber of Commerce.

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“However, we expect the Bank of Canada to continue its rate-cutting path and take another step forward in September, prioritizing economic growth as inflation eases.”

In the US, year-on-year inflation hit its lowest level in more than three years in July, another sign that the worst price increase in four decades is easing and the US Federal Reserve is eyeing a rate cut in September.

The annual inflation rate in the United States is currently 2.9 percent.

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Improvements in global supply chains and the impact of high interest rates have helped moderate price growth across the Canadian economy.

Food prices, which once grew at double-digit annual rates, are now rising at a much more moderate pace. Last month, food prices were 2.1 percent higher than a year ago.

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For many goods, such as clothing and shoes, prices have fallen compared to the previous year.

And the real estate market remained relatively quiet despite fears earlier this year that interest rate cuts could lead to increased activity.

However, there is still some price pressure, particularly in the services sector.

Prices for services rose 4.4 percent year-on-year, a trend that economists say is due to high wage growth.

However, given the overall slowdown in price growth, forecasters widely expect the Bank of Canada to continue cutting interest rates at its successive meetings.

Governor Tiff Macklem has signaled that the central bank is increasingly concerned about the risk of keeping interest rates too high for too long.

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The Bank of Canada has been closely monitoring the slowdown in the labor market as part of its monetary policy. The labor shortage has decreased significantly and the unemployment rate has risen steadily, reaching 6.4 percent in July.

At the last interest rate announcement, Macklem said the ECB Governing Council had decided to lower the key interest rate, among other things, to help the economy regain momentum.

Its key interest rate is now at 4.5 percent.

The central bank is expected to make its next interest rate announcement on September 4.

In addition to the latest inflation figures, the central bank must also consider data on second-quarter gross domestic product at the end of the month.

While most forecasters expect the central bank to cut its benchmark interest rate by a quarter of a percentage point in September, RBC economist Claire Fan said a weaker-than-expected GDP number could prompt the central bank to cut by half a percentage point instead.

“If the economic situation deteriorates faster than expected, I think it is entirely reasonable to assume that the cuts could happen more quickly,” Fan said.

According to its latest forecasts, the central bank expects the economy to have grown by 1.5 percent year-on-year between April and June.

— With files from The Associated Press.

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