Business Brief: The flawless disinflation

Good morning, today it's all about inflation, or more importantly, the lack thereof.

July's Consumer Price Index figures show that inflation in the Canadian economy continues to ease, with CPI growth falling to its lowest level since March 2021. The same is true for the US, according to data released last week. Across the continent, disinflation is one of the hottest trends of the summer.

So have policymakers managed the improbable and defeated the inflation monster without damaging the economy? We will examine this question below.

Up

• Time is on Alimentation Couche-Tard Inc.'s side as the convenience store operator tries to acquire Seven & i Holdings Co. and survive what is expected to be a lengthy regulatory approval process for the Japan-based parent company of the 7-Eleven chain.
• Canada's mining companies, grain exporters and wholesalers are preparing for lockouts or strikes at the country's two major freight railways.
• Ottawa has approved a request from Quebec to impose a six-month suspension on new applications in the low-wage sector of Montreal's temporary foreign worker program, with exceptions for several sectors.
• The spotlight will be on the health of the loan books of Canada's major banks as they prepare to report third-quarter results next week. Growth is expected to be sluggish and investors are watching for signs that the risk of defaults is rising.

IN FOCUS

The long tour of inflation

Has it really been three and a half years since the whole inflation story started? Time flies when you have to take on a second job just to afford butter.

But the end is near, and in a good way. Inflation seems to be returning to normal levels, with both Canada and the US reporting 40-month lows in consumer price index growth in July. Can we believe it? Business reporter Matt Lundy tells us.

It's been a while since we've had a nasty surprise on inflation here or in the US. How confident are you that things have normalized?

Pretty confident. We've had seven consecutive months of headline inflation within the Bank of Canada's target range of 1 to 3 percent. Many core indicators of inflation are easing. And some components of the consumer price index are falling in price. Yes, price cuts. Here's an example: Used cars were a big source of inflationary pressure a few years ago, but since July 2023, their prices have fallen by nearly 6 percent.

In addition, Bank of Canada officials are increasingly concerned that inflation underto reach the 2 percent target. Previously, they were mainly concerned with upside risks – various factors, such as the housing shortage, that could trigger a rise in prices. But these risks are also fading.

Food and accommodation prices are among the tougher categories. What do the latest figures say about the development of these two categories?

I'll start with food. We've made great progress on that front. Year-on-year, food prices rose 2.1 percent in July, matching the increase in June. Keep in mind that we had peak increases of about 11 percent in late 2022 and early 2023. Overall, food is not cheaper, but the price increases are not that shocking.

Housing costs are still a difficult subject, although things are improving somewhat. Overall, these prices rose 5.7 percent year-over-year in July, the first time they've been below 6 percent since December. Still, we're talking about pretty strong increases. Rents, for example, have risen 8.5 percent in the past year. It's possible that housing cost inflation will return to “normal” levels, but housing will remain extremely unaffordable in major markets.

Have central bankers succeeded? Have they solved inflation?

It certainly feels that way. Generally speaking, they have ignored inflation in 2021 (remember the “transitory” debate?) and have been slow to raise interest rates. But these rate hikes are working as intended. Canadians have been cutting spending and the economy has had “excess supply” for many months, helping to contain price pressures. Additionally, many households are facing the prospect of having to renew their mortgages at significantly higher rates over the next two years. The Bank of Canada has found that borrowers are putting more money aside for this scenario or making lump sum payments to mitigate the increase in their monthly bills.

All in all, we are getting closer and closer to the inflation target of two percent.

What would have to happen at this point to prevent the Bank of Canada from making cuts in September?

Frankly, I'm not sure that's possible. Money markets have fully priced in a rate cut for September, as well as further cuts in October and December. Those forecasts can change, and perhaps they will in later meetings. But for September, we'd need some shockingly good economic data, and we're running out of time. Statistics Canada will release retail sales on Friday and gross domestic product on August 30. With consumers and businesses hurting from higher rates, it's hard to see a big positive surprise in either report.

The central bank's latest announcements show that it is concerned about economic growth. Further interest rate cuts would help here.

MAPPED

Remember, as painful as it may be, the time when global financial markets were in the grip of a growing investor panic. Something about a Japanese yen carry trade gone wrong had happened and the U.S. economy was teetering on the brink of recession. Given that it was all two weeks ago, it's all a bit of a blur. But from the ashes, a new era has emerged.

On Monday, Canadian stocks showed a full recovery from the summer sell-off, with the S&P/TSX Composite Index hitting a record high. The benchmark is now up a solid 9.9 percent year-on-year. This is a good lesson for everyone to keep their composure the next time turbulence hits the markets. Otherwise, we could freak out again like we always do.

THE OUTLOOK

On our radar and our reading list

Today: Several major U.S. retailers are reporting their second-quarter results, including TJX Companies Inc. – the parent company of the TJ Maxx, Winners, HomeSense and Marshalls chains – as well as Target Corp. and Macy's Inc. Investors will be watching for signs of consumer resilience, which was key in reversing the recent wave of sell-offs in the stock market.

Morning: Toronto-Dominion Bank will be the first of the Big Six to present its financial results for the third quarter. TD's US business is under intense scrutiny, not least because of the bank's failures in combating money laundering.

Attention Swifties! Data shows that booking hotel rooms close to the big event can be cheaper than booking several months in advance. This is true for Taylor Swift shows and the Olympic Games alike.

Weak chin areas: If you've ever wanted to strengthen your jaw, you need to check out TikTok. There, you'll quickly learn a technique called “mewing.” Don't ask if this is one of those trends taken to extremes on social media. You already know the answer.

Morning markets

Global markets were mixed after a weeks-long rally to record highs, as investors looked for clearer indications from the Federal Reserve on Friday about the extent of future interest rate cuts. Futures on Wall Street and the TSX pointed higher after markets ended an eight-day winning streak yesterday.

Abroad, the pan-European STOXX 600 rose 0.29 percent in morning trading. The British FTSE 100 rose 0.12 percent, the German DAX rose 0.39 percent and the French CAC 40 rose 0.43 percent.

In Asia, Japan's Nikkei closed 0.29 percent lower, while the Hang Seng in Hong Kong fell 0.69 percent.

The Canadian dollar traded at 73.49 US cents.