The inflation rate fell sharply last month to hit the centre of the Bank of Canada’s target of 2 per cent. That’s the lowest level since the pandemic, and it would have been much lower if not for the impact of the central bank’s interest rate hikes on mortgage costs.
The 12-month change in the consumer price index (CPI) fell to 2.0% last month from 2.5% in July, Statistics Canada reported Tuesday. That was the smallest increase since February 2021 and right in line with the Bank of Canada’s long-term target of 1% to 3%.
In Quebec, the inflation rate was even lower, at only 1.5% in August, compared to 2.3% the previous month.
The slowdown in the increase in the cost of living last month in Canada is partly attributable to the price of gasoline, whose 12-month change was negative in August (-5.1%) after rising 1.9% the month before, explained the federal agency. This reversal of fortunes is due both to the drop in global prices caused by bad economic news from China and the United States, but also to the fact that the month of August 2023, to which we were comparing ourselves, had posted high prices.
However, this is not the only factor that contributed to the slowdown in price increases among the approximately 700 products and services that enter into the calculation of the CPI each month. The cost of purchasing and renting a motor vehicle was down by 1.4%; that of telephone services, by 9.3%. Having difficulty selling despite the start of the school year, clothing and shoes even experienced their first price drop in August (-0.6%) since 1971.
Inflation of 0.5% without housing
Conversely, the impact of the Bank of Canada’s interest rate hikes in recent years in its fight against inflation continues to weigh on the cost of mortgage interest (+18.8% over 12 months). In fact, annual inflation would have been only 1.2% in August without this cost and that of rents (+8.9%), and only 0.5% without the entire housing sector.
The rate of increase in the price of food purchased in stores increased slightly, from 2.1% in July to 2.4% last month, but again, this was largely due to what happened in August 2023 rather than a sudden spike in prices.
Overall, the CPI excluding the most volatile food and energy factors rose 2.4%, its slowest pace since June 2021.
Faced with a sudden surge in inflation following the COVID-19 pandemic, the Bank of Canada decided to put a strong brake on consumer demand and business investment by raising its interest rates by 0.25% to 5% from March 2022 to July 2023.
This shock therapy has finally had an effect, with the inflation rate plummeting from 8.1% in June 2022 to 2% last month. This is now eight consecutive months that inflation has remained within the Canadian central bank’s target range.
“Although it is still too early for the Bank of Canada […] claims victory in its fight against inflation, it still certainly had something to be happy about today,” observed Randall Bartlett, economist at Mouvement Desjardins, in a brief analysis on Tuesday.
Earlier this month, Canada’s central bank lowered its key rate by 0.25 percentage points for the third time in a row, to 4.25%. The latest inflation data, as well as data showing a slowdown in economic growth and job creation, should convince it to continue its momentum and even accelerate its pace, added Matthieu Arseneau and Kule Dahms, economists at National Bank. “With generalized inflation in Canada over, we believe the door is wide open for the Bank of Canada to bring its key rate back to neutral (between 2.5% and 3%) as quickly as possible by implementing more significant rate cuts.”
While waiting for the next announcement from the Canadian central bank, expected in a month, all eyes will be on the American Federal Reserve this Wednesday, which is expected to make its first rate cut in four years.
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