Canada’s inflation rate showed signs of slowing down, but we are not out of the woods just yet. The Consumer Price Index (CPI) for July increased 7.6% year-over-year, down from 8.1% in June. This was the first month-over-month disinflation since July 2021.

It is tempting to see this as an indication the economy is getting back on track but it is important to remember this is just one inflation print. Falling gas prices were part of the reason for the overall retreat in inflation.

Gasoline fell 9.2% from June to July this year due to lower worldwide demand for crude oil. Energy (electricity, natural gas, etc.) also decreased 5.4% in the same period. Other month-over month price drops included clothing and transportation which fell by 1.7% and 1.2%, respectively.

If we exclude gasoline prices from the overall CPI, prices rose 6.6% year-over-year in July, compared to 6.5% in June. This is a marginal change but it shows, broadly, prices are still going up.

The United States published its own inflation data last week. It showed that inflation also decelerated to 8.5% in July, from 9.1% in June, thanks mainly to lower energy prices. 

Have we turned the corner?

The first sign of inflation leveling after a year of steady price growth begs the question, have we reached peak inflation? We asked the same question back in May when inflation was at 6.7% - there’s always a possibility things can still get worse.

That is not to say there’s no reason for encouragement, it is just too soon to infer that from the data presented. We would need, at least, another data point and another monthly decline in the CPI before we could even begin to say that we are over the worst of it.

All eyes now turn to the next Bank of Canada meeting on September 7.

What does this mean for interest rates?

Slowing inflation may take some pressure off the Bank of Canada to continue with its aggressive interest rate hike policy. Will today’s news give the central bank enough confidence to change its trajectory a little bit?

At the time of writing the probability of a 75 Bps rate hike at the next meeting has decreased by more than 25%. A minimum 50 Bps hike is almost certain, with a 75 Bps hike still a strong possibility

As always, if you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com