Canada’s inflation rate eased for a second month in August on lower gasoline prices, a welcome development that may give the Bank of Canada confidence its interest rate hikes are working.

The consumer price index rose 7 per cent from a year ago, down from 7.6 per cent in July and a four-decade high of 8.1 per cent in June, Statistics Canada reported on Tuesday. Economists expected a reading of 7.3 per cent. During the month of August, prices fell 0.3 per cent, the largest monthly decline since the early months of the COVID-19 pandemic.

So-called core inflation -- which excludes more volatile prices to generate a better gauge of underlying pressures -- also decelerated. The average of the central bank’s three key measures dropped to 5.23 per cent from a revised 5.43 per cent in July, a record high.

“That’s moving in the right direction, because certainly for the Bank of Canada, its focus is almost entirely on those core measures because that’s a better representation of the underlying inflation pressure,” Sal Guatieri, a senior economist at Bank of Montreal, said on BNN Bloomberg Television. “I think it’s still far too early for the Bank of Canada to let down its guard, though.”

The loonie fell about two-tenths of a cent to trade at $1.3308 per U.S. dollar as of 8:36 a.m. Toronto time. Bonds rallied, pushing the yield on benchmark two-year debt down about 5 basis points to 3.802 per cent.

While the numbers aren’t likely to derail bets on further rate increases in coming weeks, the deceleration suggests the Bank of Canada’s “front-loading” of hikes is cooling the economy and slowing demand enough to wrangle price pressures down quickly -- without requiring rates to increase too far into restrictive territory.

Two weeks ago, policy makers led by Governor Tiff Macklem raised the policy interest rate by another 75 basis points to 3.25 per cent in one of the bank’s most aggressive hiking cycles ever. The rate had been holding at an emergency pandemic low of 0.25 per cent until March.

The policy rate is Canada’s highest since 2008 and also one of the highest among major advanced economies. The Federal Reserve announces its next decision Wednesday, with another outsized hike expected.

Earlier this month, Bank of Canada Senior Deputy Governor Carolyn Rogers said borrowing costs will need to rise further. She said the bank will be paying particular attention to core measures of inflation and survey results on expectations in order to assess how “broad and entrenched price pressures are.”

Markets are fully pricing in a 50 basis-point hike at the Bank of Canada’s decision next month, and another 25 basis point increase in December. Macklem and his officials are expected to stop hiking there.

Recent economic data shows Canada’s economy has already begun to gear down dramatically from a strong first half. In August, employment levels unexpectedly fell for a third straight month and the unemployment rate jumped to 5.4 per cent, from a record low of 4.9 per cent.

The latest monthly readings for economic growth show the expansion has stalled since April.

Gasoline, durable goods and shelter prices rose less in August on year-over-year basis than in July, but prices for food purchased from stores continued to increase -- rising 10.8 per cent, the fastest pace since 1981.

Regionally, prices rose at a slower pace in August than in July in every Canadian province.

However, prices are still rising faster than wages. Last month, average hourly pay rose 5.4 per cent from a year earlier. Although Canadians experienced a decline in purchasing power, the gap was smaller in August than in July, the statistics agency said.