Inflation In Canada Drops To 2.5% In July
Headline and Core CPI Ease in July
Canada’s Consumer Price Index (CPI) rose to 2.5% year-on-year in July, down from 2.7% and the lowest level since March 2021. The reading was in line with the market estimate.
Monthly, inflation rose to 0.4% in July after a rare decline in June of -0.1%, and in line with the market estimate. Higher gasoline prices were largely responsible for the jump in the monthly release.
The average of two of the Bank of Canada’s (BOC) core measures of inflation eased slightly to 2.55% year-on-year in July, compared to 2.7% in June. Core CPI excludes food and energy items and is considered a more reliable indicator of inflation trends than headline CPI.
Decline in Inflation Supports Case for September Rate Cut
The BoC will be pleased with the three-year low in inflation. It looks to continue lowering interest rates to provide a boost to the weak economy and provide relief to homeowners who are struggling with high interest rates. The BoC meets next on September 4, ahead of the Federal Reserve’s next meeting on September 18. The Fed is widely expected to deliver an initial rate cut at the meeting and the key question is whether the Fed will lower rates by a quarter point or a half point.
The fact that the Fed is virtually certain to lower rates next month will make it easier for the BoC to cut as well in September. If both central banks lower rates in September, the BOC won’t have to worry about a rate cut sending the Canadian dollar sharply lower.
The BoC lowered rates by a quarter-point at the June and July meetings, which brought the cash rate to 4.5%. This has put the BoC at the forefront of the recent global trend of lowering interest rates now that inflation has come down. Still, the benchmark rate of 4.5% is high and the BoC wants to continue trimming rates and prevent the weak economy from tipping into a recession.
Canadian Dollar, Stock Market Showing Limited Reaction
The inflation report was within expectations and not surprisingly, movement of the Canadian dollar has been limited today. The USD/CAD currency pair rose by 0.15% after the release. USD/CAD is trading quietly at 1.3627 early in the North American session. The Canadian dollar has taken advantage of broad US dollar weakness and hit its highest level in five weeks earlier today.
The benchmark Canadian index, the S&P/TSX, has opened a short time ago and has recorded small losses. The index is down 35 points (0.13%) at 23,086.
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