MNI: Canada CPI Back At BOC Target For First Time Since 2021

Canada's inflation rate returned to the central bank's target in August for the first time since the pandemic rebound and core prices also kept moving closer to that goal, further opening the door for Governor Tiff Macklem to add to his three interest-rate cuts so far this year.

Consumer price gains slowed to 2.0% from a year earlier versus the prior 2.5% pace according to Statistics Canada's report Tuesday from Ottawa, moderating further than the 2.1% economists predicted. The CPI also fell 0.2% in August from July, also better than the market consensus that prices would be unchanged.

More important for Bank of Canada officials focused on the trend of inflation because they expect some volatility before headline prices settle around the target sometime next year, the "trim" core index slowed to 2.4% from 2.7% and the "median" to 2.3% from 2.4%. Both measures were the lowest since April 2021 and reflect the broad-based cooling Governor Tiff Macklem has pointed to while cutting interest rates ahead of his G7 peers.

One colorful sign of the return to normal after inflation surged to 8% was the first drop in August clothing and footwear prices amid back-to-school shopping since 1971. Statistics Canada said those prices fell 0.6% on the month and 4.4% from a year earlier, the eighth such decline in a row, as retailers "offered more and larger discounts in August 2024 to entice consumer spending amid recent slowing demand."

Economists have been adding to projections for rate cuts amid other signs the economy is fading and Macklem is right to focus on the risk of undershooting his target. Many now calling for a series of rate cuts through a good part of the first half of next year. Some investors also see a chance for a half-point cut with the Fed poised to open its easing campaign.

Unemployment has climbed by more than a percentage point from historic lows, flash GDP figures suggest growth will fall well short of the Bank's third-quarter projection, and StatsCan also reported Tuesday that job vacancies fell for the eighth straight quarter from a prior record high. 

The inflation report still holds some of the upside risks Macklem says could slow down the easing campaign. Shelter prices remained the biggest upside force even with some moderation. Mortgage interest costs were up 19%, though they have moderated for 12 straight months from a record 31%. Excluding mortgage interest, the CPI rose 1.2% in August. Slowing headline inflation also came in part from a "base effect" around gasoline prices that likely won't be sustained. 

The Bank of Canada's July forecast was for inflation of 2.3% in the third quarter, and core inflation to average 2.5%. Monetary policy remains tight with the benchmark borrowing rate of 4.25% well above inflation.