August 2024 CPI: Inflation reaches the coveted 2% target

This is a milestone we’ve all been waiting for—the coveted 2% inflation target has been reached. The drop in prices, driven by weaker energy costs and soft economic growth, may be short-lived however. With inflation slightly below the Bank of Canada’s expectations, they may now seriously consider cutting rates by a larger amount—50 basis points. We believe they will continue on their current policy path over the next few months unless economic data deteriorates further.

• Andrew DiCapua, Senior Economist, Canadian Chamber of Commerce

KEY TAKEAWAYS

Headline

• Canada’s headline inflation decelerated to 1.95% in August, below consensus (2.1%) on a year-over-year basis. This marks the first time in over three years that prices grew at target, providing a sigh of relief that price stability is within reach. Monthly seasonally adjusted prices grew 0.1% as air transportation, gasoline, and clothing prices moderated.
• The Bank of Canada’s core measures (Trim and Median) grew at a slower pace, rising 2.4% year-over-year. Short-run core measures (3-month change annualized) increased 2.4%, which adds August as another month of price momentum within the target range (1 to 3 percent).

CPI Components

• Energy prices were the largest contributor to the decline in August CPI. Gasoline prices declined 5.1%, mainly due to base-year effects with high pump prices in August 2023.
• Shelter prices decelerated to 5.3% (previously 5.7%) from lower home heating and energy costs. Mortgage interest costs, which remain one of the fastest growing components, continues to moderate (+18.8%). Unfortunately, rent prices haven’t slowed and grew 8.9% in August, up from 8.5% in July.
• Goods inflation declined 0.7% in August driven down by durable and semi-durable goods. Clothing and footwear prices were down for the eighth consecutive month, declining 4.4% in August. Back-to-school shopping also led to prices slowing monthly. Services inflation slowed to 4.3% in August (previously 4.4%).
• Food price inflation edged up in August, growing 2.7%. Grocery store prices rose from July while restaurant prices slowed. Dairy products and vegetables were the largest contributors to food inflation in August.

Provincial and regional inflation

• Inflation slowed in all provinces in August from July.

SENTIMENT, OUTLOOK AND IMPLICATIONS

• August CPI coming in at target is surely good news, beating the inflation forecast in the Bank of Canada’s July Monetary Policy Report, which expected 2.2% year-over-year growth. We’re much closer to price stability than previously expected. But this progress may be short-lived as energy prices, clothing and weak economic activity dropped prices. Core measures improved further despite some stronger price pressures remaining in services and mortgage interest costs.
• Markets are expecting rate cuts at each of the remaining meetings this year with a larger rate cut more likely. Governing Council will surely be considering bringing the policy rate down by 50 bps at one of the upcoming meetings. Our belief remains that they will continue this current path unless the data deteriorates further. The Canadian economy isn’t on strong footing and recent data is pointing to a softer handoff to the third quarter. The incoming data is building the case for swifter action but lower rates will continue in the coming months.

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