Canada’s rate of inflation in July was 2.5%, year-over-year, the lowest since March, 2021, boding well for a Bank of Canada rate cut in September as well as a likely precursor to lower fixed mortgage rates. However, it’s a mixed bag in different parts of the economy, write Claire Fan and Abbey Xu in an RBC Economics report. “The yearly readings for both food (2.7%) and energy inflation (0.4%) were little changed. Gasoline prices were slightly higher than both last month and July a year ago. That in turn means the moderation in headline CPI came from everything else, core ex-food and energy CPI dropped to 2.7% year-over-year in July from 2.9%,” says the report. Inflation relating to housing slowed to 5.7%, year-over-year, “following persistent easing in CPI for mortgage interest costs (MIC) since fall of 2023. MIC inflation in July was still high, up over 20% from a year ago. Excluding that, headline inflation in Canada has been trending around the 2% target since January this year,” according to the report “Rent inflation is another spot that pressures are easing but slowly,” it adds. “Rent CPI in July was still elevated at 8.5% above last year. Meanwhile sluggish resale market performance is keeping a lid on inflation for owned home expenses, which remained negative on a yearly basis.” Dipping below levels last year were a smaller than expected increase in airfare and travel tours in July. As well, automotive inventories increased as supply chain management improved, slowing auto inflation as prices for new cars were about 1% above last year and prices for used cars dropped to 6% below. Fan and Xu said in their report, “The scope of price pressures also continued to normalize, the diffusion index says the breadth of inflation in Canada is looking similar to pre-pandemic norm in 2019. That’s good news for the Bank of Canada, who is actively turning their focus onto a weakening economic backdrop and the disinflationary pressures that could stem from that moving forward.” “The hurdle for more Bank of Canada cuts this year is low and we continue to look for another 25-basis point cut at its next meeting in September 4. Penelope Graham of online mortgage portal, Ratehub.ca, also forecasts another bank cut next month. “July’s CPI report indicates Canadian headline inflation is slowing as anticipated, while the core measures, key indicators tracked by the Bank of Canada, have also dropped on a monthly basis,” says Graham. “While further central bank rate cuts are already largely baked in, this further establishes the path for the BoC’s cutting cycle, and certainly another quarter-point cut to come on September 4th.” July’s inflation number means mortgage interest costs continue to fall, dropping to 21% from 22.3% in June, reflecting the cumulative effect of the Bank of Canada’s previous two rate cuts, which have lowered the cost of borrowing for many mortgage shoppers, added Graham. “Five-year Government of Canada bond yields have hovered in the 2.9% range in recent weeks, and remained stable on this morning’s inflation news, as the decrease to CPI was largely expected. However, this continues to put downward pressure on fixed mortgage rates,” she said.
