Canada: 2% Inflation in August Points to a 50-basis point Rate Cut in October September 17, 2024

While it's probably still too early for cautious central bankers to declare "mission accomplished" on inflation, proverbial champagne corks were no doubt popping at the Bank of Canada today. At just shy of 2% , headline inflation is now the lowest it's been since early 2021. Lower energy prices (-4.7%), particularly the price at the pump (-5.1%), played an outsized role in pulling down headline price gains. And while food prices posted a year-over-year increase in August that matched the July print (2.7%), total inflation excluding food and energy advanced by 2.4%-the slowest pace since June 2021. Shelter continued to make the biggest contribution to keeping price gains elevated (5.3%), albeit cooling for the fifth consecutive month in August (graph 1). This was largely thanks to lower utilities prices (-2.2%). That said, the increase in the cost of owned accommodation (5.5%) also slowed in the month, while the price of rented accommodation reaccelerated (to 8.6%, up from 8.3% in July). Prices of household operations and furnishing (-0.8%) also helped to pull down headline inflation, as did clothing and footwear (-4.4%).

All told, there was a lot to like in the August inflation report. With headline inflation slowing sharply and landing right on the Bank of Canada's 2% target, it would appear that the Bank's goal of returning to low and stable inflation is here. Indeed, the gradual rise in the unemployment rate and slowing pace of economic growth relative to the Bank's most recent forecast (2.8% annualized in Q3 versus our tracking of just 1%) suggest high interest rates are working to cool the economy. In fact, maybe they're working too well. As such, we think the is likely to cut the policy rate by 50-basis points at its October announcement. After that, the Bank will probably return to its gradual pace of 25-basis point rate cuts, keeping the option open to accelerating the pace of cuts if warranted by economic conditions.