Canada’s consumer price index fell to 2.5 per cent in July, the lowest level since March 2021, solidifying the case for the Bank of Canada to cut its policy rate this month.
The disinflation was broad-based and included components from food to recreation and, most notably, shelter.
The disinflation was broad-based and included components from food to recreation and, most notably, shelter. All measures of core inflation, which excludes the more volatile food and energy components, also fell and inched closer to the 2 per cent target.
We expect the Bank of Canada to reduce its policy rate by 25 basis points at its meeting this month, with another cut before the year’s end to bring the policy rate to 4 per cent.
Additionally, we expect a series of 25 basis-point cuts next year until reaching a terminal rate of between 3% and 3.5%.
Shelter rose by 5.7 per cent, a slower rate than the 6.2 per cent rate in June. Shelter has been the most stubborn piece of the inflation puzzle, which the Bank of Canada has finally begun to crack.
Perhaps paradoxically, recent rate cuts are helping to lower shelter inflation. As the policy rate has dropped, mortgage interest costs have grown at a slower pace, and households renewing their mortgages in July experienced a smaller sticker shock compared with those who renewed months earlier.
A further easing of the policy rate would continue to put a lid on the rise of mortgage interest costs.
The other reason for disinflation in housing is the slowdown in rent growth, which stood at 8.5 per cent compared to 8.8 per cent in June, brought about by a combination of stronger supply and weaker demand.
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Condominium units started during the pandemic have now hit the market, adding to the supply of rental housing. At the same time, a slowdown in immigration because of recent restrictions of international students and temporary workers has helped curb demand.
Households hit by high interest rates have cut back on discretionary spending. While households prioritized spending on services and experiences for a while, demand for dining out and travel is fizzling out. This suggests that wage growth will also ease in the coming months.
On a year-over-year basis, prices for travel tours fell by 2.8 per cent, while prices for traveler accommodations fell by 3.7 per cent and air transportation was down by 2.7 per cent.
Prices of restaurant food grew by 3.8 per cent, the lowest in nearly three years. Prices of vehicles also fell, by 1.4 per cent, while prices of used vehicles fell by 5.7% as demand stabilized and supply caught up.
The takeaway
Inflation numbers have consistently come in below expectations this year and is firmly on track to reach 2 per cent next year. The current policy rate is as a result too restrictive, and more rate cuts are needed to trim the increase in mortgage interest payments and enable recovery.
