Canada’s inflation rate drops to 2.5%

Inflation is now the lowest it’s been in over two years. pic.twitter.com/npsY7kllfk

— Justin Trudeau (@JustinTrudeau) August 20, 2024

Canada’s annual inflation rate dropped to 2.5 percent in July, the lowest level since March 2021, according to Statistics Canada. The deceleration in price growth was broad-based, with lower prices for travel tours, passenger vehicles, and electricity contributing to the overall decline. The latest data has led economists to predict that the Bank of Canada will implement its third consecutive rate cut in September.

Inflation has gone down again — to 2.5%. We’ve still got a lot more work to do to make sure Canadians feel that relief in their bank accounts.

But inflation is cooling, and that’s welcome news.

— Justin Trudeau (@JustinTrudeau) August 20, 2024

The central bank uses its policy rate to control borrowing costs across the country, adjusting the rate to manage economic growth and inflation. Economists and money markets are now forecasting rate cuts of 25 basis points at each of the Bank of Canada’s remaining monetary policy meetings in 2024. If these predictions come true, the benchmark policy rate could drop from 4.5 percent to below four percent by the end of the year. In June, the Bank of Canada delivered its first rate cut in over four years.

📉 At 2.5%, inflation has slowed to a rate not seen since 2021, but our work continues.

Every Canadian should be able to afford groceries, afford housing, and we’re working hard every day to make sure of it. The job’s not finished until everyone benefits! pic.twitter.com/5ANxp8GuXf

— François-Philippe Champagne (FPC) 🇨🇦 (@FP_Champagne) August 20, 2024

At that time, the bank was cautious, aiming to assess the effect of falling borrowing rates on the economy and Canadian households. However, the situation has significantly changed since then, with growing fears that inflation could drop too far below the two percent target. The Canadian labour market is also showing signs of strain, with the unemployment rate increasing as the economy shed jobs over the past two months.

Canada’s inflation rate on the decline

The Bank of Canada’s governing council has expressed concern about the labour market deteriorating further, which could delay the rebound in economic growth and consumption. TD Bank estimates that the Bank of Canada has considerable leeway in reducing interest rates without risking progress on inflation. James Orlando, director of economics at TD Bank, expects the central bank to continue with rate cuts, potentially at every meeting, until rates reach two or 2.5 percent by the end of next year. Tu Nguyen, an economist at RSM Canada, notes that the central bank is not yet ready to declare victory over inflation, which will prevent larger cuts of 50 basis points or more. Wage growth remains a concern, and hastened rate cuts could ignite inflation again, especially in sectors like the housing market due to cheaper mortgages. Despite some ongoing price pressures, particularly in the services sector, the overall slowing price growth suggests continuing cuts in interest rates by the Bank of Canada. Governor Tiff Macklem has indicated a growing concern about the risks of maintaining high interest rates for an extended period. The Bank of Canada is scheduled to make its next interest rate announcement on September 4. Alongside the latest inflation figures, the central bank will consider second quarter gross domestic product data. Most forecasters predict a 0.25 percentage point cut, though a weaker-than-expected GDP print could lead to a 0.5 percentage point cut.