This morning we got the last inflation reading before the September 4 Bank of Canada interest rate decision. And in our view it was good enough to warrant another rate cut next month.

A less heady headline - Canada’s overall (or headline) inflation rate dipped from 2.7% in June to 2.5% in July, the lowest since March 2021. Higher gasoline prices exerted some upward pressure, but this was offset by lower-travel related costs. Inflation came in as expected, with the Bloomberg median forecast at 2.5%.

The trend is your (rate-cutting) friend - The trend, or core, readings of inflation, cooperated last month. The median measure edged down 0.2 percentage points to 2.4%, and the trim down 0.1 points to 2.7%. The 3-month moving average,* which strips out year-ago base effects, also moved lower.

*Month-over-month changes in the 3-month moving average, annualized

Shelter - The thorn in the (inflation) side - What’s left in price pressures is mostly coming from shelter. But even shelter costs grew at a slower rate of 5.7% y/y—a 12 month low. Stripping out shelter costs, the annual inflation rate was only 1.2%. Much attention has been paid to the impact of mortgage interest costs, which are related to monetary policy itself. Excluding mortgage costs, the Consumer Price Index grew only 1.8% y/y—it hasn’t been lower since February 2021. Mortgage interest costs are still rising quickly (+21% y/y), but down from a peak of 31% in the summer of 2023.

Food - Expensive, but packing less inflation punch - Food prices rose 2.7% y/y, down slightly from the 2.8% pace set the month prior. Food prices are still very high (23% above January 2021 levels), but not the same inflation driver as they were in 2022 and 2023.

Implications

For a Bank of Canada now more concerned about downside risks and signally more dovish confidence this summer, today’s consumer price reading clearly points to a September cut. Inflation has held in the 1% to 3% control range since January, core inflation points to a cooling trend, and near term inflation expectations are easing. There are some near-term risks to be sure—sticky wages and the potential for a rail strike (to name a couple)—but overall easing of price pressures paves the way for further rate cuts.

In addition to the CPI reading, the labour market has softened. The last two monthly job reports have shown effectively no growth in jobs, and annual is growth concentrated in part-time and public sector positions. Further, the economy is not growing fast enough to absorb all the new entrants in the labour market, namely youth and newcomers to Canada.

In addition to a cut in early September, we have now built into our forecast a Bank of Canada cut on October 23 and December 11 (25-basis points each), putting the policy rate at 3.75% by year end.

Alberta’s inflation rate declines - Alberta’s annual inflation rate dropped from 3.0% to 2.7% last month—the lowest since November.

There are two opposing forces—electricity and rent.

Electricity fell 35% y/y. Recall last summer, when electricity prices spiked amid strong summer demand and constrained supply. Electricity rates have since fallen with new capacity coming online. The decline in electricity costs offset a 13% y/y increase in gasoline prices, resulting in a 3% y/y dip in energy costs.

Rental costs are up 11.7% y/y. That’s much higher than the 8.3% increase nationally, but down from 14.5% the month prior. 

The breakdown for the two largest centres and Alberta shows Calgary’s inflation rate at 2.9% vs. 2.4% in Edmonton last month, with Calgary recording faster growth in owned accommodation costs.

Excluding energy and food prices, Alberta’s core inflation rate was 3.0% vs. 2.7% nationally.

Answer to the previous trivia question: Maine is the only U.S. state that shares a land border with only one other state.

Today’s trivia question: Which city is further south: Calgary or London (U.K.)?