OTTAWA – Inflation in Canada is falling faster than expected, but economists don’t expect the Bank of Canada to give up its fight just yet.
The annual rate of inflation slowed to 7.0 per cent in August, Statistics Canada said Tuesday in its latest monthly consumer price index (CPI) report.
Ahead of the report’s release, RBC had forecast August inflation to be 7.2%.
The slowdown is largely due to the drop in the price of gasoline, however, Canadians are still feeling the pinch at the grocery store.  Food prices rose at their fastest pace since 1981 in August, with prices rising 10.8 percent from a year ago.
Excluding gasoline prices, annual inflation was 6.3%, making August the first month since June 2021 where annual inflation excluding gasoline has slowed.
“This is about as good a report on inflation as we can hope for,” BMO’s managing director of Canadian rates and macro strategist Benjamin Reitzes said in an email to clients.
The Bank of Canada will pay particular attention to preferred measures of core inflation, which tend to be less volatile and help the bank see temporary changes in the consumer price index.  All these measures point to a slowdown in annual inflation in August as well.
Randall Bartlett, senior director of Canadian economists at Desjardins, said that while the latest numbers are good news, the Bank of Canada will likely continue on its path of higher interest rates.
“We don’t think this report suggests the Bank of Canada is close to mission accomplished yet,” he said.  “But it’s certainly good news and suggests that inflation is heading in the right direction.”
In a speech delivered Tuesday afternoon at the University of Waterloo, Bank of Canada deputy governor Paul Beaudry echoed the concerns of some that the central bank would need to plan for a major economic slowdown, or even a recession, to reduce inflation.
Beaudry said the Bank of Canada believes people set their inflation expectations partly based on past inflation and partly on communication from central banks.  The deputy governor said the bank was leaning toward effective communication with the public about monetary policy to help ease some of the heightened inflation concerns.
“The bank is committed to keeping its communications during this difficult period clear, simple and focused on our inflation mandate,” he said, adding that the more effective the bank is with its communications, the more likely it is to avoid recession.
The Bank of Canada has been laser-focused on lowering inflation expectations, which were elevated in recent surveys.  If people’s expectations start to fall, Bartlett said that could affect future decisions on the bank’s interest rates and the overall tone on inflation.
Earlier this month, the Bank of Canada raised its key interest rate for the fifth time this year.  With the increase of three-quarters of a percentage point, the bank’s prime rate now stands at 3.25%.
The bank is due to make its next interest rate announcement on October 26 and has warned that more rate hikes are needed to get inflation to its two percent target.
TD expects the Bank of Canada to raise rates again in October and raise its key rate to 4% by the end of the year.
The latest inflation report also shows the gap between inflation and wages narrowing, with average hourly wages rising 5.4 percent in August compared to inflation of 7.0 percent.
Despite slowing inflation, the cost of living remains stubbornly high for Canadians.
On a monthly basis, overall consumer prices were slightly lower in August than in July.
Statistics Canada said the CPI fell 0.3 per cent from July to August, the biggest monthly drop since the early months of the pandemic.
As grocery prices soared in August, bakery prices rose 15.4%, while prices for fresh fruit were 13.2% higher than last year.
Statistics Canada attributes the acceleration in food prices to continued supply chain disruptions, the Russian invasion of Ukraine, extreme weather and higher input costs.
As for the slowdown in headline inflation, the feds said transportation and shelter prices led to the slowdown in consumer prices.
Natural gas prices rose 22.1 percent in August from a year ago, but fell 17.9 percent from June.
Housing costs fell slightly from July to August, but remained 6.6% higher than a year ago.
This report by The Canadian Press was first published on September 20, 2022.