Canadian Inflation Rate Falls to Lowest in Three Years in July

Canada’s July inflation rate fell to its lowest since March 2021, likely paving the way for another Bank of Canada interest rate cut in September. 

Statistics Canada’s consumer price index pegged the overall July inflation rate at 2.5%, down from a 2.7% gain in June and in line with market expectations. The May inflation rate came in at 2.9%. 

Deceleration in headline inflation was “broad-based” in July, StatsCan said, stemming from lower prices for travel tours, passenger vehicles and electricity. Inflation has remained below 3% since January and continues to close in on the Bank of Canada’s preferred target of 2%. 

Shelter costs remain the main factor putting upward pressure on inflation, rising 5.7% on a year-over-year basis in July. However, that is still down from the 6.2% gain in June.  

On the other hand, electricity prices fell 0.8% year-over-year in July, following a 2.4% gain in June, while prices for passenger vehicles were down 1.4% after a 0.4% decline in June.  Prices for food purchased from stores were up 2.1% in July, matching the gain from June, and above the 1.5% advance in May. 

With further evidence inflation is indeed cooling, most analysts and economists expect the Bank of Canada to trim its key overnight lending rate from its current level of 4.5% at its next rate announcement on Sept. 4. The Bank has already cut the overnight rate twice this year, announcing 25-basis point reductions in both June and July. The initial cut in June represented the first fall in the overnight rate in over four years.