Inflation in Canada eased to 7% in August as gas prices fell but food prices continue to rise

Canada’s annual inflation rate fell for the second month in a row in August, a sign that the Bank of Canada’s campaign to curb price growth through much higher borrowing rates is having its desired effect.

The Consumer Price Index (CPI) It was up 7 percent in August from the previous year, Statistics Canada Tuesday said in a report. That was lower than the 7.3 per cent estimate of financial analysts. Inflation slowed from 7.6 percent in July and 8.1 percent in June, which was close to a four-decade high.

Prices fell 0.3 percent in August from July, which was higher than analysts had expected. Gasoline prices, which fell 9.6 percent during the month, were the main driver of lower inflation. But it wasn’t just the pumps where consumers found some relief.

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Shelter costs fell on a monthly basis for the first time since January 2021, helped by a modest drop in rents. The prices of clothes and shoes also fell. In contrast, the Bank of Canada’s average annual inflation measure – which removes volatile aspects of the CPI and gives a better sense of core inflation trends – fell to 5.2 per cent in August from 5.4 per cent in July.

“Is that too good to be true? Royce Mendes, head of macro strategy at Desjardins Securities, wrote to clients.” However, it may be true that easing supply chain stresses, lower commodity prices and an economy hypersensitive to interest rates are all conspiring to see price growth cold in Canada before other jurisdictions,” such as the United States.

However, there were some disappointing signs. Grocery prices rose 10.8 percent On an annual basis, it’s the fastest pace in more than 40 years. The Bank of Canada was quick to point out that the 7 per cent inflation rate is too steep for comfort.

“While we are heading in the right direction, this is still very high,” Paul Beaudry, deputy governor of the Bank of Canada, said in a speech Tuesday at the University of Waterloo.

“We will continue to take whatever measures are necessary to restore price stability to households and businesses and to maintain Canadians’ confidence in our ability to meet our mission of bringing inflation back to 2 percent.”

Two weeks ago, the Bank of Canada raised its policy rate by 75 basis points to 3.25 per cent, as part of a violent walking cycle that began in March, when rates were epidemically low by 0.25 per cent. (A base point is 1/100 of a percentage point). Although the pace of inflation has slowed recently, analysts expect the central bank to rise again at its meeting in late October.

“We’re seeing good trends” on inflation, Claire Fan, chief economist at Royal Bank of Canada, said in an interview. “With core inflation continuing to rise, and in order for that rate to fall consistently and fast enough to 2 per cent, central banks will have no choice but to raise more,” she added. Ms. Fan expects a policy rate of 4 per cent by the end of the year.

The Federal Reserve will announce its next interest rate decision on Wednesday. Analysts expect the Fed to raise its target for the federal funds rate by 75 basis points, to a range of 3 percent to 3.25 percent.

Inflation is proving difficult to tame in the United States. The country reported last week that its annual inflation rate has fallen to 8.3 percent. But core inflation – excluding food and energy – accelerated month on month. This led to a sell-off in the stock market amid fears of a recession caused by rising interest rates.

Canadian inflation numbers are likely to ease again due to gasoline in September. As of Monday, the national average price of regular unleaded gas was 155.4 cents a liter, down 9.5 percent from the daily average in August, according to data from Kalibrate Technologies.

What hasn’t improved are grocery prices. Over the past 12 months, meat prices increased by 6.5 percent, bakery products by 15.4 percent, fresh fruits by 13.2 percent and pasta products by 20.7 percent. “Food supplies continued to be affected by several factors, including extreme weather, rising input costs, the Russian invasion of Ukraine, and supply chain disruption,” Statscan said in a report on Tuesday.

Another persistent problem is that wages are still lagging behind inflation. Average hourly wages rose 5.4 percent in August from the previous year, part of a prolonged erosion in Canadians’ purchasing power.

Statscan noted that price growth is slowing for durable goods, which has been a huge area of ​​consumer demand during the pandemic, as people have directed their spending away from services. Prices of home appliances rose 9 percent year-on-year, down from 11.5 percent in July, as Statscan cited “low consumer demand.”

Ms. Fan expects consumer spending to slow further as households deal with higher debt servicing costs. “It’s going to really reduce their income and start to have a bigger impact,” she said.

On Monday, Statscan reported that prices for industrial products and raw materials fell in August for the third month in a row, including energy, petroleum products, fertilizers and softwoods.

“It takes time for these to flow through the supply chain and production layers, in order to reach consumers at lower prices,” Ms Fan said. “But we expect that’s what’s to come, at least for merchandise trade.”