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Canadian inflation ticks up but underlying data may bode well for interest rates
August 15, 2023
Authored by RSM Canada LLP
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REAL ECONOMY BLOG | August 15, 2023
Canada’s July inflation figures are a somber reminder that the road back to 2% will take time and patience.
The headline inflation rate stands at 3.3%, above the 1-3% target range after months of sharp decline, according to data Statistics Canada released Tuesday.
A 3.3% inflation rate is clearly uncomfortable but not surprising due to a base-year effect in gasoline prices, which dropped 9.2% in July 2022. In addition, various rebate and price cap programs that kept energy prices low a year ago are no longer in effect, leading to higher energy prices this year and overall higher year-over-year numbers.
Even then, the Bank of Canada will likely hold in September as the drop in inflation has occurred faster than expected. More importantly, core inflation measures are showing signs of cooling, albeit slowly and still elevated at above 3.5%.
July’s inflation figures join a raucous chorus of data, including employment and housing metrics, that will fluctuate for the rest of 2023 and make noise as the economy muddles through a downturn.
This flip-flopping should not be concerning as long as the overall trend heads in the right direction. Nuances in the data, such as seasonality or the effects of rebate and other price control programs, must be considered to determine price trends in the upcoming months.
The latest Canadian pricing data
One sign of solace is the food inflation rate, which, at 7.8% thanks to lower fresh produce prices, is the lowest since March 2022.
On a year-over-year basis, gasoline prices fell 12.9% from the peak of summer 2022. On a month-over-month basis, the Consumer Price Index rose 0.6% as a result of high travel prices in the peak season of July.
Increasing mortgage interest rates are another large driver of price increases. This is a direct result of restrictive monetary policy. As households renew their mortgages, they are being met with steep increases in interest rates. Although this affects the headline number, it is to be expected and will continue as more mortgage terms are up.
The inflation outlook and what it means for interest rates
One should expect inflation to hover around the 3% mark for at least a few more months; getting to 2% will be the ultimate challenge.
Even with the July uptick, the Bank of Canada will likely hold in September. The economy is already showing signs of cooling, and July’s inflation figures, despite being slightly higher, are not unwarranted. The Bank of Canada will monitor emerging data to determine whether they can stop at a rate peak of 5%.
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This article was written by Tu Nguyen and originally appeared on 2023-08-15 RSM Canada, and is available online at https://realeconomy.rsmus.com/canadian-inflation-ticks-up-but-underlying-data-may-bode-well-for-interest-rates/.
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