Inflation in Canada fell more than expected

Inflation slowed more than expected, but concerns remain

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Canada’s headline inflation slowed for the second month in a row in August, running at an annualized pace of 7.0 per cent which was less than economists’ expectations of 7.3 per cent and less than July reading 7.6%.

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Statistics Canada said on Tuesday that the slowdown in the Consumer Price Index was the largest since early in the COVID-19 pandemic.

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It has eased slightly all three core inflation measures, which the Bank of Canada is watching closely, but it is still far from the central bank’s 2 per cent target.

In a speech later that day, Bank of Canada Deputy Governor Paul Beaudry acknowledged that while trends were going in the right direction, the pace of price hikes was still too high. He added that since the central bank began targeting inflation in 1991, the bank has largely succeeded in keeping inflation around the 2 percent target.

“Today, that record is being seriously tested as we emerge from the first global pandemic in a century and grapple with the effects of Russia’s unprovoked invasion of Ukraine,” Bewdry said. September 20 speech He accepted the University of Waterloo School of Arts, adding that both factors drove up inflation.

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He further noted that “monetary policy is being actively tightened to calm the economy and contain these pressures.”

Tuesday’s slowdown stemmed in large part from lower gasoline prices, which were down 9.6 percent from the previous month, the biggest monthly drop since April 2020. Gasoline prices fell the most in Saskatchewan and Alberta. However, the price of gasoline is still 22.1 percent higher than last year.

Excluding gasoline, inflation rose 6.3 percent on an annual basis, down from 6.6 percent in July.

Travel and accommodation costs have also risen at a slower pace.

However, grocery prices rose 10.8 percent from the previous year, the fastest pace since 1981, driven up by severe weather, rising input costs and disruption to supply chains due to the Russian invasion of Ukraine.

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Meat prices are up 6.5 percent from last year, dairy, 7 percent, baked goods, 15.4 percent, and fresh fruit, 13.2 percent.

Pewdry raised two concerns to inform Canadians’ expectations of inflation: “adaptive” expectations where Canadians see high inflation and expect it to rise further, regardless of what the Bank may convey; What he called a “rational” response whereby Canadians assume the effects of monetary policy will bring inflation back to the long-term target. Beaudry said the truth lies somewhere in between these theories.

“On some level, you don’t need an economist to tell you this: Nobody naively assumes that just because inflation is high today, it’s going to stay there,” Beaudry said. “Instead, people do their best to understand the economic environment and form expectations based on that understanding.”

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“However, this environment is complex, so mental gymnastics associated with fully rational expectations seems understandably strange,” Beaudry added.

Bank of Canada Governor Teff McClem participates in a press conference in Ottawa.
Bank of Canada Governor Teff McClem participates in a press conference in Ottawa. Photo by Blair Gable/Reuters Files

While describing these theories, Beaudry raised the issue of credibility, which Bank of Canada Governor Teff McClem said Acknowledge that it is being tested The bank aims to bring inflation back into balance in July.

In closing, Beaudry reiterated that the bank will do what is necessary to bring inflation down to 2 per cent and preserve Canadians’ confidence in the central bank.

“Even after today’s slowdown, annual inflation remains well above the Bank of Canada’s target, so further rate increases are still in the pipeline,” Andrew Grantham, chief economist at CIBC Capital Markets, wrote in a note after the data. .

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“However, there appears to be a clearer gap opening between Canadian and US inflation trends, which should lead to a lower top of the Bank of Canada than the Federal Reserve.”

In the run-up to Tuesday’s inflation data, economists had thought that price pressures in Canada could ease faster than said US CIBC chief economist Avery Shenfield, who said a divergence in the treatment of shelter costs in Canadian inflation figures could cause cost pressures. Except for food and energy they are faltering at a faster pace.

While a second monthly drop in inflation readings may make policymakers rest somewhat easier, Royce Mendez, MD and head of macro strategy at Desjardins, questioned in his note after the data whether the numbers were “too good to be true.”

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“We’ve seen false ideas in numbers before, with recent US inflation data a prime example,” Mendes said in a September 20 note. “However, it may be true that easing supply chain stresses, lower commodity prices and an extremely interest rate sensitive economy are all conspiring to see price growth cool in Canada ahead of other jurisdictions.”

Mendes added that Tuesday’s figures reinforce Desjardins’ economic team’s position that the Bank of Canada has another 50 basis point hike up its sleeve.

Overall, economists expect the central bank will err on the side of caution and raise interest rates again on October 26.

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