(Bloomberg) -- Inflation in Canada decelerated to the slowest pace in more than three years, keeping the central bank on track to cut rates for a third straight meeting next month.
The consumer price index rose 2.5% in July from a year ago, following a deceleration to a 2.7% pace a month earlier, Statistics Canada reported Tuesday in Ottawa. That matched the median estimate in a Bloomberg survey of economists.
The deceleration was broad-based, driven by lower travel tour, passenger vehicle and electricity prices, and marked the seventh consecutive month of headline rates running within the central bank’s target range. It also marks the lowest rate of annual inflation in the country since March 2021.
Markets added to dovish bets in the half hour following the release, with Canada’s two-year government bond yield down five basis points to 3.274%. The loonie pared back most of the day’s gains against the greenback, trading at C$1.362 per US dollar as of 8:54 a.m. Ottawa time. US treasury yields also extended declines amid the Canadian bond rally.
On a monthly basis, the consumer price index climbed 0.4% due to higher gasoline prices, also matching expectations. It rose 0.3% on a seasonally adjusted basis.
The central bank’s two core inflation measures decreased, averaging a 2.55% yearly pace, from a downwardly revised 2.7% a month earlier. Economists had expected 2.65%.
A three-month moving average of the core rates fell to an annualized pace of 2.71%, from 2.91% in June, according to Bloomberg calculations.
Tuesday’s data will give Bank of Canada policymakers a clear runway to proceed with another 25 basis-point cut on Sept. 4, which is widely expected by observers. Most economists also predict cuts at the following two meetings, in October and December, which aligns with market pricing.
“We think the Bank of Canada will continue their path of interest rate cuts and move again in September, prioritizing economic growth as inflation moderates,” Andrew DiCapua, an economist with the Canadian Chamber of Commerce, said in a statement.
“Interest rates remain too restrictive given soft underlying growth.”
July’s inflation print is the only consumer price report before the next rate decision. It follows a labor force survey that showed the country shed 2,800 jobs that month while the unemployment rate held at 6.4%, the highest in more than two years. Gross domestic product data for the second quarter is set to be released Aug. 30 and will be the last major economic data before the central bank’s decision.
During their deliberations last month, some Bank of Canada officials said they’re worried that a further decline in the job market may delay a recovery in consumer spending and put downward pressure on growth.
The Federal Reserve is also widely expected to deliver a 25-basis point cut at its next meeting on Sept. 17-18. The two countries’ economies are deeply intertwined and expected easing in the US allows Bank of Canada Governor Tiff Macklem to keep normalizing borrowing costs without risking consequences for the loonie.
“There is nothing in the CPI report that would concern the Bank of Canada and prevent a 25 basis-point cut at the September meeting,” Charles St-Arnaud, chief economist at Alberta Central, said in an email. A larger cut would signal that the bank is in “panic mode,” which isn’t warranted by the data, he added.
Benjamin Reitzes, rates and macro strategist at Bank of Montreal, also said the data firms up a quarter-point cut next month. “There’s no urgency to act more aggressively at this point, but the cuts will keep coming as inflation continues to move toward 2%,” he said in an email.
What Bloomberg Economics Says...
“Durable and core goods deflation show restrictive monetary policy is gaining traction in the real economy. As the labor market cools, we expect services price pressures to abate more meaningfully, as well.”’
— Stuart Paul, US and Canada economist
Read the full report here.
In July, mortgage interest costs and rent remained the biggest contributors to the annual change in the rate of inflation. Mortgage interest costs were up 21% in July compared with 22.3% in June, while rents rose 8.5% compared with 8.8% previously. Excluding shelter costs, the consumer price index rose 1.2% from a year ago, versus 1.3% in June.
Excluding food and energy, the index rose 2.7% from a year ago, down from 2.9%. Services inflation increased 4.4%, compared with 4.8% in June. Goods prices rose 0.3% from a year earlier.
Food prices rose 2.7%, versus 2.8% in June.
Regionally, annual inflation rose at a slower pace in July compared with June in five of 10 provinces. Inflation slowed the most in the east coast provinces of Prince Edward Island and Nova Scotia, due to a deceleration in prices for gasoline, fuel oil and other fuels.
--With assistance from Erik Hertzberg and Jay Zhao-Murray.
(Adds more economist reaction, updates market reaction.)
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