Canadian inflation holds steady
OTTAWA • Inflation in Canada was firmer than expected last month, keeping underlying price pressure right at the central bank’s target and giving policy- makers one less reason to consider immediate interest rate cuts.
Annual consumer price inflation was two per cent in July, matching June’s pace, Statistics Canada said Wednesday. Economists had expected inflation to slow to 1.7 per cent. Core inflation, a better gauge of underlying pressure, unexpectedly ticked up slightly to 2.03 per cent.
Stronger inflation dynamics in Canada are one reason why economists and markets are anticipating fewer cuts, and a slower pace of reductions, by the Bank of Canada than the U.S. Federal Reserve. Markets are pricing in just one rate cut in Canada over the next six months, versus three for the Fed, even though some analysts have begun to speculate a cut could take place as early as the next rate decision in September due to trade tensions.
“It’s an argument against a September rate cut, but they’ll still have to respond with stimulus if the global economy slows significantly,” Andrew Kelvin at TD Bank.
Underlying price pressure has been remarkably stable near the Bank of Canada’s two- per- cent target for well over a year. Helping the inflation outlook has been a strong rebound in growth in the second quarter, with the nation’s expansion seen accelerating to almost three per cent annualized over that three- month period. GDP data are due next week.
“The economy still looks to be humming along,” said Shaun Osborne at Scotiabank. It “makes the September rate cut call from the Bank of Canada very marginal at best, outside of some significant external event.”
Price gains had been expected to ease over the summer months, with the Bank of Canada projecting annual inflation to temporarily fall to 1.6 per cent in the third quarter before returning to two per cent. That may still happen, given the strength in July could be due to temporary factors and methodological quirks.
Air transport and travel tours were the biggest upward contributors to monthly CPI, along with gasoline.
“Overall the report shouldn’t do much to alter thinking at the Bank of Canada as many of the moves seem likely to reverse,” CIBC economist Royce Mendes said in a note to investors.