The economy is not slowing as quickly as the BoC expected: Economist Charles St-Arnaud
Inflation ticked back above the Bank of Canada’s control range in July, but progress on underlying price pressures leaves room for policymakers to pause interest-rate hikes.
The consumer price index rose 3.3 per cent from a year ago, the first reacceleration since April, Statistics Canada reported Tuesday in Ottawa. That was faster than the median estimate of 3 per cent in a Bloomberg survey of economists. On a monthly basis, the index rose 0.6 per cent, double their expectations.
The Canadian dollar reversed earlier losses after the release of the data to trade at $1.346 per U.S. dollar at 8:45 a.m. Ottawa time. Bonds slumped, with the yield on two-year Canada debt jumping as high as 4.831 per cent.
The hot headline rate, however, is watered down by some easing in the core measures. Two key yearly inflation measures tracked closely by the central bank — the so-called trim and median core rates, which filter out items with extreme price fluctuations — eased, averaging 3.65 per cent from a downwardly revised 3.7 per cent a month earlier.
A three-month moving average of the measures that Governor Tiff Macklem has mentioned as key to his team’s thinking fell to an annualized pace of 3.49 per cent, from an upwardly revised 3.91 per cent previously, according to Bloomberg calculations.
“The modest slowing in core CPI is a bit of a silver lining for policymakers in a generally strong CPI report,” Benjamin Reitzes, a rates and macro strategist at Bank of Montreal, said in an email. The Bank of Canada “likely wants to move to the sidelines in September and give prior hikes time to have an impact, but the inflation figures aren’t making that an easy call.”
The numbers highlight a challenge in the current phase of the inflation fight after favorable base effects — which lent a helping hand to the deceleration in recent months — ran their course. July’s reacceleration in the headline inflation rate was partly due to gasoline prices, which fell sharply in July 2022 and so did not have the same downward impact on the 12-month inflation number as in June.
Macklem and his officials already anticipated consumer price gains would remain near 3 per cent for the next year, saying last month that the next stage in the decline toward the 2 per cent target is “expected to take longer and is more uncertain.”
The latest inflation print with cooling core measures — along with recent signs of softening in the economy and labour market — may pave the way for policymakers to return to pause mode as early as their next meeting on Sept. 6. The majority of economists expect the central bank to hold the overnight rate steady at 5 per cent next month.
The continued above-target gains in the core measures “will cause some concern for the Bank of Canada and means it is still too early to rule out a further interest rate hike altogether,” Olivia Cross, an economist at Capital Economics, said in a report to investors. “Nonetheless, we still expect a more pronounced easing of core inflation later this year.”
This is the last of two inflation reports before that decision. The first set of data in June showed inflation slowed to within the bank’s control range for the first time since March 2021, but progress in cooling underlying pressures had essentially stalled. July’s core movements will help alleviate concerns over that setback.
On a year-over-year basis, prices for gasoline fell 12.9 per cent in July after a 21.6 per cent decline in June, while on a monthly basis, prices remained nearly unchanged at 0.9 per cent.
The mortgage interest cost index posted another record year-over-year gain and remained the largest contributor to the headline rate. Excluding mortgage costs, the rate rose 2.4 per cent.
Grocery prices grew at a slower pace year over year, rising 8.5 per cent last month after a 9.1 per cent increase in June.
Services inflation rose to 4.3 per cent in July from 4.2 per cent one month earlier.
On a monthly basis, higher prices for travel tours led the gain, with July being a peak travel month.
Regionally, prices rose at a faster pace in July compared with June in all provinces except British Columbia and Saskatchewan. Price growth accelerated the most in Prince Edward Island, largely due to a rise in energy prices.
In Nova Scotia, consumers saw gasoline prices jump 14 per cent from a month earlier, the fastest pace in the country, primarily due to the introduction of the carbon levy and higher wholesale prices.