Canada's inflation rate falls to 2.5% in July, the lowest since March 2021

Canada's annual inflation rate fell to 2.5 percent in July — from 2.7 percent in June, Statistics Canada said on Tuesday.

The national statistics office said inflation has risen at its slowest pace in more than three years since March 2021.

The slowdown was attributed in part to lower travel prices compared to a year ago, when prices for tours, airline tickets and accommodations soared in the first summer without COVID-19 restrictions.

Prices for passenger cars and electricity also fell compared to the previous year.

Food costs rose 2.1 percent, while housing costs rose 5.7 percent. Rental costs rose 8.5 percent year-on-year, while mortgage rates were 21 percent higher amid rate hikes that began in early 2022.

Prime Minister Justin Trudeau welcomed the news in a social media post.

“We still have a lot of work to do to ensure Canadians feel that relief in their bank accounts. But inflation is cooling, and that is welcome news,” he wrote on X.

Challenges remain

David MacDonald, an economist at the Canadian Centre for Policy Alternatives, pointed out that the costs of things like food remained high, although their price increases had slowed since last summer.

Economists call this effect the base effect. This refers to the influence of price movements from the previous year on the calculation of the annual inflation rate.

“They are still important for the average citizen because prices are not falling. It's just that these increases happened over a year ago,” he said.

Another report from Statistics Canada earlier this week highlighted how difficult it is for many Canadians to make ends meet financially.

The report found that median after-tax family income in 2022, adjusted for an annual inflation rate of 6.8 percent, was four percent lower than in 2021.

According to Statistics Canada, the biggest decline was among single-parent families where the parent was under 25. The amount fell 15.1 percent in constant dollars to $24,690 in 2022.

Experts expect further interest rate cuts

Overall, price pressures in Canada have steadily eased this year, with the annual inflation rate remaining below three percent since January.

The Bank of Canada was encouraged by this progress and lowered its key interest rate at its last two policy meetings.

Governor Tiff Macklem has indicated that further interest rate cuts are imminent as long as inflation continues to decline.

At the last interest rate announcement, Macklem said the ECB Governing Council had decided to lower the key interest rate, among other things,
the economy is picking up speed again.

WATCH HERE: What the Governor of the Bank of Canada says about inflation:

“Why is core inflation important to us?” explains the Governor of the Bank of Canada

Tiff Macklem, governor of the Bank of Canada, says core inflation – which strips out volatile parts of the consumer price index – gives the bank a sense of where the trend is headed.

Its key interest rate is now at 4.5 percent.

Analysts said recent inflation figures pave the way for further interest rate cuts.

“Overall, the Bank of Canada will welcome today's report as it confirms that inflation continues to ease. In addition, the magnitude of inflationary pressures and the dynamics of core inflation point to further progress,” said Charles St-Arnaud, chief economist at Alberta Central.

TD Bank chief economist James Orlando said “nothing is stopping the bank from cutting rates by another 25 basis points.”

“As inflation risks subside, the central bank's focus is turning to weakness in the rest of the economy,” he said.

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