Inflation declined by 0.3% in August for the second monthly decline in a row thanks to cooling gasoline and energy prices, according to data released by Statistics Canada on Tuesday.
The consumer price index rose by 7.0% in August on a year-over-year basis, down from a 7.6% gain in July. The easing gives hope that the worst of the inflation woes are behind us.
Somewhat surprisingly, even though August is peak travel season, prices of recreation decreased by 1.6% on a monthly basis from July.
This represents a possible return to normal after pent-up demand for travel, concerts and festivals caused prices to skyrocket and resulted in delays across the nation in July.
Transportation prices rose by 10.3% on an annual basis in August and shelter prices were up by 6.6%. While these areas strain many households’ budgets, these numbers represent a marked decline from the past few months.
Notably, gasoline prices and natural gas prices are both quickly declining. In Alberta and Saskatchewan, natural gas prices are on the steepest decline since 2015 as global demand slows.
Even more encouraging, measures of core inflation also decreased for the first time since the early days of the pandemic. The Bank of Canada looks at core inflation, which excludes volatile prices, as a way to measure underlying price pressures.
The relief in core inflation provides a powerful signal that the central bank’s rate hikes are having an impact.
But it is not yet time to breathe a sigh of relief. Prices of groceries have increased by 10.8% over the past year, the fastest pace since August 1981 as the ramifications of the war in Ukraine continue to be felt.
Inflation expectations, at least for now, remain elevated, as wages went up by 5.4% on an annual basis. This means that the Bank of Canada still has some work to do.
Amid cooling demand and high interest rates, inflation might fall further over the next few months.
Still, be ready for a 50 basis-point hike by the Bank of Canada next month. While we do not expect another outsized rate hike, the central bank is likely to continue its campaign of rate increases until inflation falls further and expectations are under control. A mild contraction of the economy would be the necessary tradeoff.