Canada inflation cools to 40-month low of 2.5% in July

Canada's annual inflation rate dropped to a 40-month low of 2.5% in July, aligning with forecasts, while core inflation indicators also eased, according to data released on Tuesday. This trend supports the Bank of Canada's plan to reduce interest rates again in September.

Money markets anticipate another 25 basis point rate cut at the Bank's upcoming announcement on September 4, with a total of three cuts expected this year. Most economists agree on a similar rate reduction path, which could lower the benchmark rate to 3.75% by the end of the year.

Andrew Grantham, senior economist at CIBC Capital Markets, noted, "With inflationary pressures easing but concerns about a weakening labor market growing, we still predict three more 25bp cuts by the Bank of Canada at the remaining meetings this year."

The central bank has already lowered its policy rate at the last two consecutive meetings, bringing it down to 4.5% from 5% before the first cut. In its most recent monetary policy announcement, the focus shifted from solely controlling inflation to also stimulating the economy.

The inflation rate is now closer to the Bank of Canada's 2% target than at any time since March 2021, when inflation was 2.2% as prices began to rise about a year into the pandemic.

Following the CPI report, the Canadian dollar gave up some gains, trading up 0.04% to 1.3628 against the U.S. dollar, or 73.38 U.S. cents. Yields on two-year Canadian government bonds fell by 3.5 basis points to 3.416%.

Two of the Bank of Canada's preferred measures of underlying inflation, CPI-median and CPI-trim, slowed to their weakest rates since April 2021. CPI-median decreased to 2.4% from 2.6% in June, while CPI-trim dropped to 2.7% from 2.8%.

The overall decline in July's inflation was primarily due to lower prices for travel tours, passenger vehicles, and electricity, according to the statistics agency. Specifically, travel tour prices fell by 2.8% annually in July after a 7.4% increase in the previous month, and passenger vehicle prices declined at their fastest pace since November 2012. Goods prices rose by 0.3% annually, the same as in June, while services inflation slowed to 4.4% from 4.8%.