Canada’s inflation rate eases to 7% in August as gas prices fall but food costs continue to climb

Canada’s inflation rate eases to 7% in August as gas prices fall but food costs continue to climb

Canada’s annual inflation rate fell for a second consecutive month in August as gasoline and other products dropped, offering some hope that the Bank of Canada’s campaign to restrain price growth through much tighter lending conditions is having its intended effect.

The Consumer Price Index (CPI) rose 7 per cent in August from a year earlier, Statistics Canada said Tuesday. That was lower than financial analysts’ estimate of 7.3 per cent. Inflation has slowed from 7.6 per cent in July and 8.1 per cent in June, a near four-decade high.

On a monthly basis, the CPI fell 0.3 per cent in August, which again was weaker than what analysts expected. Gasoline prices, which fell 9.6 per cent in August from July, were a key driver of lower inflation. But it was not only the pumps where consumers found some relief.

Shelter costs dropped for the first time since January, 2021, helped by a modest decline in rents. Clothing and footwear prices also fell. The average of the Bank of Canada’s core measures of annual inflation – which strip out volatile aspects of CPI and give a better sense of underlying inflation trends – fell to 5.2 per cent in August from 5.4 per cent in July.

There were, however, some discouraging signs. Grocery prices rose 10.8 per cent on an annual basis, the quickest pace in more than 40 years.

“Is this too good to be true? We’ve seen head fakes in the numbers before, with recent data on U.S. inflation a prime example,” Royce Mendes, head of macro strategy at Desjardins Securities, wrote to clients. “However, it could be true that easing supply chain pressures, falling commodity prices and a highly interest-rate sensitive economy are all conspiring to see price growth cool in Canada ahead of other jurisdictions.”

Indeed, the U.S. reported last week that its annual inflation rate ebbed to 8.3 per cent. However, core inflation – excluding food and energy – accelerated on a monthly basis, leading to a market selloff on fears that consumer price growth is proving sticky. The Federal Reserve will announce its next interest-rate decision on Wednesday. Analysts expect the Fed to hike its target for the federal funds rate by 75 basis points, to a range of 3 per cent to 3.25 per cent.

The Bank of Canada is likewise raising interest rates in aggressive fashion, aimed at tamping down inflation. The bank’s policy rate was recently hiked to 3.25 per cent. Despite a slower pace of inflation, analysts expect the central bank to hike again at its meeting in late October, given that consumer price growth is still far above the bank’s 2-per-cent target.

“Inflation likely hasn’t slowed far enough, or for long enough, to convince the Bank of Canada that further interest rate hikes aren’t necessary,” Andrew Grantham, senior economist at CIBC Capital Markets, said in an investor note.

“However, today’s inflation readings, as well as other data highlighting a slowing Canadian economy, support the view that interest rates here should peak below what the Federal Reserve will need to do in the U.S. in order to get inflation back to a 2% target.”

The annual inflation rate is likely to get another assist from gasoline in September. As of Monday, the national average of regular unleaded gas was 155.4 cents a litre, down 9.5 per cent from the daily average in August, according to data from Kalibrate Technologies.

What hasn’t improved is grocery prices. On a 12-month basis, meat has risen 6.5 per cent, bakery products by 15.4 per cent, fresh fruit by 13.2 per cent and pasta products by 20.7 per cent. “The supply of food continued to be impacted by multiple factors, including extreme weather, higher input costs, Russia’s invasion of Ukraine, and supply chain disruptions,” Statscan said in Tuesday’s report.

Price growth is slowing for durable goods, which had been a big area of consumer demand during the pandemic, as people directed their spending away from services. Household appliances rose 9 per cent on an annual basis, down from 11.5 per cent in July. Citing “reduced consumer demand,” Statscan said price growth was also cooling for refrigerators, laundry machines, dishwashers and cooking appliances.