Canadian Inflation Hits 3.5-Year Low, Further Rate Cuts Expected

• Canadian inflation fell to 2.5% in July, marking the lowest level in 3.5 years, down from 2.7% in June. This decrease aligns with economists’ expectations and strengthens the case for the Bank of Canada to continue cutting interest rates.
• The slowdown was driven by a reduction in the growth of housing costs, food prices, and a significant drop in vehicle prices. Housing inflation eased to 5.7% from 6.2% in June, while food prices rose by 2.7%, slightly down from the previous month’s 2.8%. Notably, vehicle prices decreased by 1.4% in July, following a 0.4% drop in June.
• Core inflation, which excludes volatile items, also decreased to 1.7% from 1.9% in June. Additionally, the Bank of Canada’s preferred measure of inflation, which excludes extreme price movements, fell to 2.7% from 2.8%.
• These trends have led analysts to predict that the Bank of Canada may lower interest rates by 25 basis points during its meeting on September 4, with the possibility of further cuts later in the year. The central bank’s key interest rate could drop to 3.75% by year-end from the current 4.5%.

Ottawa, August 21 (FFN) – Canada’s inflation rate dropped to 2.5% in July, reaching its lowest point in 3.5 years and reinforcing expectations of further interest rate cuts by the Bank of Canada. This marks a continuation of the country’s efforts to stabilize its economy amidst global economic uncertainties.

The decline in inflation was primarily due to slower increases in housing costs, food prices, and a more substantial decrease in vehicle prices. Housing inflation, which has been a significant contributor to the overall rate, slowed to 5.7% in July from 6.2% in June. Food prices also showed a slower rate of increase, rising by 2.7% compared to 2.8% in June. Additionally, the cost of personal vehicles saw a notable decrease, with prices dropping by 1.4% in July, following a 0.4% drop in the previous month.

Core inflation, an important metric for the Bank of Canada that strips out the most volatile items, fell to 1.7% from 1.9% in June. Moreover, the central bank’s preferred inflation measure, which adjusts for extreme price changes, also declined to 2.7%.

These developments have led many analysts to predict that the Bank of Canada will reduce its benchmark interest rate by 25 basis points at its next meeting in September. Furthermore, there is speculation that additional rate cuts could follow, potentially bringing the key interest rate down to 3.75% by the end of the year from its current level of 4.5%.

Key Inflation Data for Canada (July 2024)