Shouldn’t we be celebrating another sub–2% inflation reading?

Not these days. Today’s Canadian inflation report was expected with the Consumer Price Index up 1.7% year over year in July. That’s a moderation from 1.9% in June and the fourth straight month below 2% - the Bank of Canada’s target.

But digging deeper, the inflation cooldown is due to lower energy prices (particularly gasoline). Within the energy bundle, the April 1 removal of the carbon tax continues to weigh on year-over-year (y/y) readings.

In contrast, the underlying, or core, inflation rate that the Bank of Canada cares a lot about remains sticky at closer to 3% (based on the two main measures - trim and median). That’s on the upper end of the target range of 1-3%.

Tariffs are an inflationary force to worry about, and you can see some pressure on durable goods (up 2.9% y/y), and in particular vehicles (4.5%) offsetting some of the downdraft from energy costs.

That said, even the inflation hawks should admit that the longer-term easing of shelter costs is a positive development. True, shelter is still rising faster than overall inflation at 3% y/y (and last month accelerated slightly). But the trend is shelter will add less to inflation. This reflects a broader slowdown in the housing market, and continued drag from mortgage interest costs. Rents should also add less to inflation in the coming months in our view. In July 2024, rental accommodation costs rose 8.3% y/y. The rate last month was 5%, and falling ‘posted’ rents point to a further slowdown.

Turning to Alberta, the annual inflation rate fell to its lowest level since February 2021, coming in at 1.3%. This is an energy price story, with an even larger drop than seen nationally in gasoline and natural gas prices pushing down the headline rate. Excluding energy and food costs (yet another core measure), inflation was 2.6% in Alberta vs 2.5% nationally.

This report on its own doesn’t change the Bank of Canada’s rate calculus for September. But when combined with the weak July jobs report and the dovish language from the July rate announcement, it leaves the door open to a September cut. There is still another CPI and jobs report before the next announcement on September 17, so there is plenty of time and data for the BofC to digest. But overall this report, in our view, creates some rate cutting runway. We will wait for the data before making our September call ‘official’.

Either way, the main message has not changed. The Bank of Canada is almost done cutting, and is not coming to the economic rescue. Our current forecast is for two more cuts this year and then a hold. On the policy side, the jolt will need to come from other (non-monetary) levers. The big one could come through an acceleration of major projects, and we await details from the federal government on what this will look like.

Answer to the previous trivia question: The Eaton’s mail order catalog dates back to 1884.

Today’s trivia question: What company recently purchased the rights to the Hudson's Bay Company's brand name, trademarks, and associated intellectual property?