Slowing inflation not enough to prevent interest rate hike in September, economists say

Inflation in Canada finally seems to have peaked, but it remains too high to dissuade the Bank of Canada from raising interest rates significantly in September, according to economists.

The year-on-year inflation rate slowed to 7.6% in July, Statistics Canada reported on Tuesday, with the deceleration largely due to lower gasoline prices even as oil prices food, rent and travel continued to increase.

Economists had pointed to the nearly 40-year high of 8.1% in June as the likely high point for the headline inflation rate, which had previously risen every month since June 2020.

In another indication that price gains are slowing, the agency said July’s month-over-month increase was the smallest since December 2021.

Yet inflation is well above the Bank of Canada’s 2% target.

Bank of Canada Governor Tiff Macklem made the point in an op-ed published by the National Post on Tuesday, saying inflation “remains far too high” and stressing the central bank’s role in reducing inflation. ‘inflation.

Macklem said he understands that higher interest rates make Canadians’ financial hardship worse, but that higher borrowing costs are the best way to curb the rising cost of living.

“It is by increasing the cost of short-term borrowing that we will reduce long-term inflation. It will ultimately be better for everyone because high inflation hurts us all. It eats away at our purchasing power and makes it difficult to plan our spending and savings decisions,” Macklem said.

The Bank of Canada is hoping that a series of interest rate hikes will dampen demand in the economy enough to slow the pace of price increases.

“It takes higher rates and inflation to cause people to slow down their spending habits, which in fact hasn’t happened to this extent,” said TD’s chief economist, Beata Caranci, noting that consumer spending in Canada has grown at a faster rate. pace than in the United States during the first half of the year.

Caranci said the central bank was paying more attention to core measures of inflation, which are less volatile than the headline figure and have remained relatively unchanged since June.

Economists widely expect the Bank of Canada to raise its key rate by three-quarters of a percentage point on September 7.

Whatever the central bank plans to do, Trevor Tombe, an economics professor at the University of Calgary, said the latest inflation data is unlikely to change its plans, noting that there is a gap between interest rate decisions and their impact on the economy.

“They’re not going to speed up or slow down their plans, just based on what we see in this report,” Tombe said. “It’s important to remember that monetary policy takes a long time to work its way (into the economy).”

The Statistics Canada report echoes the most recent inflation data in the United States, which saw the rate of price increases fall to 8.5% in July, from 9.1% the previous month, also largely due to lower prices at the pump.

Americans are still absorbing larger price increases than they have in decades, with rising prices for groceries, rental housing and medical care costs.

In Canada, although gasoline prices rose 35.6% in July from a year earlier, this is down from the whopping 54.6% increase recorded in June. Still, Canadians are feeling the pinch of inflation as the cost of food rose 9.9% from a year ago, the fastest pace since August 1981.

Tu Nguyen, an economist at accounting and advisory firm RSM Canada, said the “pervasiveness” of inflation in the economy means there is still some way to go before the strain on the finances of Canadians does not decrease significantly.

“It will take some time before households can breathe a sigh of relief. Wage growth continues to lag inflation, resulting in a loss of purchasing power for households,” Nguyen said in a note.

The average hourly wage rose 5.2% in July compared to a year ago.

Statistics Canada said the downward pressure on prices at the pump was due to a combination of factors, including continued concerns over a slowing global economy, increased public health restrictions related to COVID-19 in China and the slowdown in gasoline demand in the United States.

Among food items that have become significantly more expensive, baked goods are up 13.6% from last year due to rising input costs, with the Russian invasion of Ukraine continuing to exert a upward pressure on wheat prices. Prices for other food items also rose faster, including eggs, up 15.8%, and fresh fruit, up 11.7% from last year.

As mortgage costs rise with rising interest rates, the report notes that rental prices are accelerating, rising faster in July than the previous month.

As more Canadians travel during the busy summer season, air fares rose about 25% in July compared to the previous month. Prices for traveler accommodation have risen almost 50% over the past year, with the strongest price increases in Ontario.

By Nojoud Al Mallees


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