2024-09-17 15:45:58
The inflation rate fell to 2% in August in the country, finally reaching the Bank of Canada’s target after a tumultuous fight against soaring prices.
According to Statistics Canada, inflation hit its lowest level since February 2021 last month. In July, the consumer price index had increased by 2.5%.
In Quebec, inflation is even lower, at 1.5% in August from one year to the next, compared to 2.3% in July.
The slowdown in inflation in Canada is partly attributable to the drop in gasoline prices, which fell by 5.1%.
Meanwhile, clothing and footwear prices fell 0.6% month-over-month, marking their first decline since 1971. Retailers offered deeper discounts to attract consumers amid slowing demand.
Core measures of inflation, which are closely watched by the Bank of Canada and exclude price volatility, also edged lower in August.
The slowdown in price growth last month was sharper than the 2.1% annual increase forecasters had expected and will likely spark talk of a deeper interest rate cut next month.
“Not a threat” to the Bank of Canada
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“Inflation is not a threat and the Bank of Canada should now focus on stimulating the economy and stopping the rise in the unemployment rate,” wrote Andrew Grantham, CIBC senior economist.
Benjamin Reitzes, managing director of Canadian rates and macro strategy at BMO, said Tuesday’s numbers “tip the scales” slightly in favour of more aggressive cuts. He added that the Bank of Canada will have access to another inflation report before its October rate announcement.
“If we have another big downside surprise, calls for a 50 basis point cut will only strengthen,” Reitzes wrote in a note to clients.
The Bank of Canada began rapidly raising interest rates in March 2022 in response to soaring inflation, which peaked at 8.1% a few months later.
The central bank’s key rate reached 5% before being lowered three times since last June.
The combination of recovering global supply chains and high interest rates has helped slow price growth in Canada and elsewhere in the world.
Bank of Canada Governor Tiff Macklem recently signaled that the central bank is prepared to increase the depth of its interest rate cuts if inflation or the economy slows more than expected.
The key rate currently stands at 4.25%.
CIBC expects the central bank to cut its key interest rate by two percentage points by the middle of next year.
In the United States, the Federal Reserve is expected to make its first interest rate cut in four years on Wednesday.
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Potential impacts of the lowered inflation rate on monetary policy.
Canada’s Inflation Rate Falls to 2%, Reaching Bank of Canada’s Target: A Turning Point in the Economy?
The Canadian economy has finally reached a major milestone, with the inflation rate falling to 2% in August, matching the Bank of Canada’s target. This marks a significant turning point in the country’s ongoing battle against soaring prices, which had reached a peak of 8.1% just a few months ago.
A Shift in the Right Direction
According to Statistics Canada, the consumer price index (CPI) increased by 2% in August, down from 2.5% in July. This decline is attributed to a drop in gasoline prices, which fell by 5.1%, as well as a decrease in clothing and footwear prices, which fell by 0.6%. This marks the first decline in clothing and footwear prices since 1971, as retailers offered deeper discounts to attract consumers amidst slowing demand.
Regional Variations
The story varies across regions, with Quebec experiencing an even lower inflation rate of 1.5% in August, compared to 2.3% in July. This regional disparity is a crucial aspect of the Canadian economy, as different provinces face unique challenges and opportunities.
Core Measures of Inflation
Core measures of inflation, which exclude price volatility and are closely watched by the Bank of Canada, have also edged lower in August. This indicates that the underlying trend in inflation is indeed slowing down, providing a more accurate picture of the economy’s performance.
Implications for Interest Rates
The slowdown in price growth is likely to spark talk of a deeper interest rate cut next month. Economists and experts are already weighing in on the
How does the recent drop in Canada’s inflation rate to 2% affect interest rates?
Canada’s Inflation Rate Falls to 2%: What This Means for Monetary Policy and Interest Rates
The latest inflation data from Statistics Canada has revealed that the country’s inflation rate has fallen to 2% in August, finally reaching the Bank of Canada’s target after a prolonged struggle against soaring prices. This marks the lowest level of inflation since February 2021, and is a significant decrease from the 2.5% inflation rate recorded in July. In Quebec, the inflation rate is even lower, at 1.5% in August, compared to 2.3% in July.
The Factors Behind the Decline in Inflation
So, what’s behind this welcome drop in inflation? One key factor is the recent decline in gasoline prices, which fell by 5.1% in August. Additionally, clothing and footwear prices also saw a decrease, falling by 0.6% month-over-month, marking their first decline since 1971. Retailers have been offering deeper discounts to attract consumers amid slowing demand, which has contributed to this downward trend.
Core Measures of Inflation Also Edge Lower
Core measures of inflation, which are closely watched by the Bank of Canada and exclude price volatility, have also edged lower in August. These core measures are seen as a more accurate reflection of the underlying trend in inflation, and their decline suggests that the economy is indeed experiencing a cooling in price growth.
Implications for Monetary Policy and Interest Rates
So, what does this mean for monetary policy and interest rates in Canada? The slowdown in price growth in August is likely to spark talk of a deeper interest rate cut next month. Many economists believe that the Bank of Canada should now focus on stimulating the economy and stopping the rise in the unemployment rate, rather than worrying about inflation.
Not a Threat to the Bank of Canada
As Andrew Grantham, CIBC senior economist, notes, “Inflation is not a threat and the Bank of Canada should now focus on stimulating the economy and stopping the rise in the unemployment rate.” Benjamin Reitzes, managing director of Canadian rates and macro strategy at BMO, agrees, stating that Tuesday’s numbers “tip the scales” slightly in favour of more aggressive cuts.
Potential Impacts of the Lowered Inflation Rate on Monetary Policy
The lowered inflation rate could have significant implications for monetary policy in Canada. With inflation no longer a pressing concern, the Bank of Canada may be more likely to cut interest rates in order to stimulate economic growth and address rising unemployment. This could have a positive impact on the economy, making borrowing cheaper and increasing consumer spending.
What’s Next for Interest Rates in Canada?
As the Bank of Canada prepares for its next rate announcement in October, all eyes will be on the upcoming inflation report. If the data continues to show a downward trend in inflation, calls for a 50 basis point cut in interest rates could grow louder. As Reitzes notes, “If we have another big downside surprise, calls for a 50 basis point cut will only strengthen.”
the decline in Canada’s inflation rate to 2% in August is a welcome development, and is likely to have significant implications for monetary policy and interest rates in the country. As the Bank of Canada weighs its options, it’s clear that the economy is in need of stimulation, and a cut in interest rates could be just what’s needed to get things moving again.
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