Canada's CPI data for July, released by Statistics Canada this morning, make it all but certain that the Bank of Canada will implement a further 25 basis point cut in interest rates at its next fixed announcement date, on September 4. Headline CPI rose 2.5 percent in July from a year ago, down from the 2.7 percent reported for June, marking the smallest annual increase since March 2021.
The favourable year-on-year outcome owed a great deal to a helpful base effect, as the monthly increases -- 0.4 percent unadjusted, 0.3 percent seasonally adjusted -- were slightly less encouraging. StatsCan drew particular attention to prices for travel tours, which fell 2.8 percent in July, whereas in July 2023 they had risen very rapidly in response to the removal of COVID restrictions. That being said, all of the major sub-components of the headline index are now within the Bank's 1 - 3 percent target range, except for shelter costs, which stood 5.7 percent higher than a year ago as a result of increases in mortgage costs and rents.
The main special aggregates are also within the target range, with all items except food rising 2.5 percent and all items except food and energy up 2.7 percent. All three of the Bank's preferred measures of core inflation also moved lower in July, with their mean value falling to just under 2.5 percent.
Beyond the now inevitable September cut, the Bank of Canada's policy actions for the balance of 2024 and into 2025 will remain data-dependent. As long as monthly inflation data remain well-behaved, the Bank's decisions will increasingly be based on the performance of the real economy, and particularly the labour market. In the event that the economy really does tip over into the recession the media have been craving for the last two years and more, the Bank now has much more flexibility to do something about it.
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