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Canada’s annual inflation rate slowed to 2.5 per cent in July, according to Statistics Canada, down from 2.7 per cent in June, supporting expectations for a third consecutive interest rate cut from the Bank of Canada next month.
The rise in the Consumer Price Index (CPI) marks the slowest increase since March 2021, when inflation was 2.2 per cent and started picking up steam in the wake of the COVID-19 pandemic. The slowdown was in line with analyst expectations.
“Canadian inflation continued to ease in July, keeping the door to further interest rate cuts wide open,” CIBC economist Andrew Grantham wrote in a research note on Tuesday.
“With inflationary pressures fading away but concerns about the weakening labour market growing, we continue to forecast three further 25 basis point cuts by the Bank of Canada at the remaining meetings this year.”
The Bank of Canada cut its benchmark interest rate by 25 basis points in June and July, bringing its policy rate to 4.5 per cent. The central bank has signalled that more cuts could be ahead if inflation continues to ease towards its target range of between 1 and 3 per cent.
The Bank of Canada’s closely watched measures of inflation – CPI-median and CPI-trim – also eased. CPI-median slowed from 2.6 per cent in June to 2.4 per cent in July, while CPI-trim eased from 2.8 per cent to 2.7 per cent.
“The steady progress in year-over-year inflation is more than enough for the BoC to press on with rate cuts, and the sharper-than-expected drop in the core measures cements a consecutive rate cut path into the end of the year,” Kyle Chapman, an FX market analyst at Ballinger Group, wrote in a statement.
“Markets had already fully bought into a string of cuts, and today’s figure is just extra fuel.”
BMO Capital Markets managing director of Canadian rates and macro strategist Benjamin Reitzes said Tuesday’s inflation report further cements 25 basis point cut in September.
“There’s no urgency for policymakers to act more aggressively at this point, but rate cuts will keep coming as inflation continues to move toward 2 per cent and the economy sports a sizeable output gap,” Reitzes wrote in a research note.
Money markets expect another 25 basis point cut at the bank’s next rate announcement on Sept. 4 and are nearly pricing in a total of three more cuts this year, according to Reuters.
On a monthly basis, CPI increased 0.4 per cent in July. Seasonally adjusted, CPI rose 0.3 per cent. Provincially, inflation was weakest in Saskatchewan, with CPI rising 1.6 per cent, while New Brunswick recorded the biggest rise, at 2.9 per cent.
Statistics Canada said the deceleration in headline inflation was broad-based, and helped by lower prices for travel tours, passenger vehicles and electricity. Gasoline prices increased on a monthly basis, rising 2.4 per cent in July, offsetting some of the downward pressure on the basket of goods measured by the federal agency.
Shelter price growth slowed on an annual basis compared to June, rising 5.7 per cent versus 6.2 per cent the month before. The easing was helped by a slowdown in the price of electricity, mortgage interest costs, rent and fuel oil and other fuels.
Grocery prices increased 2.1 per cent annually, rising 0.3 per cent on a monthly basis. On an annual basis, meat prices were up 3 per cent, dairy products up 1.8 per cent, and fresh vegetables up 5.1 per cent, while fresh fruit prices fell 0.1 per cent.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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