Mortgage interest costs continue to drive inflation, while clothing prices fall for the eighth month
In August 2024, the Consumer Price Index (CPI) rose 2 percent year-over-year, the slowest increase since February 2021, according to Statistics Canada.
This represents a drop from July’s 2.5 percent rise. The decline in headline inflation is partly attributed to lower gasoline prices and a base-year effect. Excluding gasoline, the CPI increased by 2.2 percent in August, down from 2.5 percent in July.
Mortgage interest costs and rent were the largest contributors to the rise in the CPI for August. On a monthly basis, the CPI declined by 0.2 percent, following a 0.4 percent increase in July.
The fall was driven by lower prices in air transportation, gasoline, clothing and footwear, and travel tours. Seasonally adjusted, the CPI still rose by 0.1 percent in August.
Gasoline prices contributed significantly to the overall slowdown. Year over year, prices at the pump fell by 5.1 percent in August, after rising by 1.9 percent in July.
This decrease was due to both a base-year effect and lower oil prices, linked to economic concerns in the United States and reduced demand from China. Monthly, gasoline prices rose 4.6 percent in August 2023 but declined by 2.6 percent in August 2024, marking the third monthly drop in four months.
The mortgage interest cost index rose at a slower pace for the 12th consecutive month, increasing by 18.8 percent year-over-year in August, after peaking at 30.9 percent in August 2023.
Despite this slowing growth, mortgage interest costs have remained the largest driver of the CPI increase since December 2022. Without mortgage interest costs, the CPI rose by 1.2 percent year-over-year in August.
Clothing and footwear prices fell 0.6 percent month-over-month in August, a decline not typically seen in this month, which usually experiences increased demand due to back-to-school shopping.
Compared to August 2023, retailers offered larger discounts in August 2024 to boost consumer spending amid slowing demand. Year-over-year, prices for clothing and footwear dropped for the eighth consecutive month, declining by 4.4 percent in August, following a 2.7 percent decline in July.
Food prices showed a mixed trend. Consumers paid 2.4 percent more for groceries year-over-year in August, compared to a 2.1 percent rise in July. This increase resulted from a base-year effect, particularly in dairy prices (3.3 percent) and fresh fruit prices (1.5 percent).
However, on a monthly basis, grocery prices declined by 0.2 percent, largely due to seasonal reductions in fresh vegetable prices, which dropped by 2.8 percent.
Regionally, prices rose more slowly year-over-year in August than in July across all provinces.
According to Financial Post, the two percent inflation rate in August reached the Bank of Canada’s target and could lead to more aggressive interest rate cuts.
Economists believe the odds of a 50-basis-point rate cut at the Bank of Canada’s October meeting have increased.
James Orlando, senior economist at Toronto-Dominion Bank, said, “Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate,” noting that the current rate is still about 200 basis points higher than necessary for the economy.
David Rosenberg, founder, and president of Rosenberg Research & Associates Inc., emphasized the significance of upcoming US Federal Reserve decisions, as well as other data, in shaping the Bank of Canada's future actions.
“The complete lack of any inflationary concerns at a time when the labour market is cracking up like an April ice sheet makes the case for a more aggressive easing policy very persuasive,” Rosenberg said.
The drop in gasoline prices, which fell 5.1 percent year-over-year, played a major role in August's deceleration. Core inflation measures eased, with CPI-common at 2.0 percent, CPI-median at 2.3 percent, and CPI-trim at 2.4 percent, all of which fall within the Bank of Canada’s target range.
Stephen Brown, deputy chief North American economist at Capital Economics, explained that August’s lower inflation was mainly driven by base effects, predicting a rise to 2.5 percent by the fourth quarter of 2024.
“The details of August release provide further evidence that the inflation battle is almost won,” he said, sparking speculation of a possible 50-basis-point rate cut by the Bank of Canada.
Governor Tiff Macklem, in an interview with Financial Times, indicated that steeper rate cuts remain possible if economic growth fails to meet expectations.
