Inflation in Canada eases more than expected

Inflation has slowed for the second month in a row

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Canada’s headline inflation fell for the second month in a row in August, trailing economists’ expectations of 7.3% and hovering at an annual pace of 7.0%, down from July’s 7.6%.

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The slowdown in the consumer price index was the biggest since the early days of the COVID-19 pandemic, Statistics Canada said on Tuesday.

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The decline was largely driven by lower gasoline prices, which fell 9.6% month-on-month, the biggest monthly drop since April 2020. Gasoline prices fell the most in Saskatchewan and Alberta. However, gasoline prices remain 22.1% higher than last year.

Excluding gasoline, inflation rose 6.3% y/y, down from 6.6% in July.

The pace of increase in travel and accommodation costs has also slowed.

However, food prices rose 10.8% year-on-year at the fastest pace since 1981 due to extreme weather, rising input costs and supply chain disruptions from Russia’s invasion of Ukraine.

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Meat prices are up 6.5% from last year, dairy products 7%, baked goods 15.4% and fresh fruit 13.2%.

All three key inflation measures closely monitored by the Bank of Canada eased slightly, but are still far from the central bank’s 2% target.

Bank of Canada Deputy Governor Paul Baudry conceded that although the trend was heading in the right direction, the pace of price increases was still too fast. He added that the central bank has been largely successful in keeping its inflation target around 2%.

In a speech at the University of Waterloo School of the Arts on September 20, Baudry said, “Today, as we emerge from a century-old global pandemic and face the consequences of a unilateral Russian invasion of Ukraine, the record stands. “It’s being seriously tested,” he said. Both factors pushed up inflation.

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“Monetary policy is aggressively tightening to cool the economy and contain these pressures,” he further noted.

Beaudry raised two concerns that inform Canadians’ inflation expectations. And what he called the “reasonable” response is that Canadians assume that the effects of monetary policy will return inflation to target in the long run. it’s somewhere in between.

“At some level, without telling an economist, no one simply thinks that inflation is high today means it will continue,” said Beaudry. “Instead, people do their best to understand the economic environment and form expectations based on that understanding.”

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“But that environment is complex, so mental gymnastics associated with perfectly rational expectations understandably feels alien,” Beaudry added.

Bank of Canada Governor Tiff McCrem attends a press conference in Ottawa.
Bank of Canada Governor Tiff McCrem attends a press conference in Ottawa. Photo by Blair Gable/Reuters File

While explaining these theories, Baudry raised the issue of reliability. Bank of Canada Governor Tiff Macklem acknowledged that credibility is being tested as the bank aims to return inflation to equilibrium in July.

Finally, Governor Baudry reiterated that banks will do what is necessary to raise inflation to 2% and maintain the confidence of Canadians in the central bank.

“Even after today’s slowdown, annual inflation remains well above the Bank of Canada’s target, leaving more rate hikes likely,” said Andrew Grantham, senior economist at CIBC Capital Markets in a note after the data was released. There is,” he pointed out. .

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“However, there appears to be a more pronounced gap between inflation trends in Canada and the United States, which should result in a lower peak for the Bank of Canada than for the Federal Reserve.”

Avery Shenfeld, chief economist at CIBC, said the difference in the treatment of shelter costs in Canada’s inflation rate could cause cost pressures excluding Canadian inflation. Food and energy for falling at a faster pace.

In a note following the data, Royce Mendes, managing director and head of macro strategy at Desjardins, questioned whether the numbers were “too good to be true.”

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“Recent data on U.S. inflation is a prime example, and we have seen head fakes in numbers before,” Mendez said in a Sept. 20 memo. “But it may be true that easing supply chain pressures, falling commodity prices, and a highly interest rate-sensitive economy have all conspired to cool Canadian price inflation ahead of other jurisdictions. Hmm.”

Mendez added that Tuesday’s figures reinforce Desjardins’ economic team’s stance that the Bank of Canada will raise another 50 basis points.

Overall, economists expect the central bank to let its guard down and raise rates again on Oct. 26.

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Inflation in Canada eases more than expected

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