Inflation decelerates in July as car prices shift into reverse

The annual rate of inflation cooled to 2.5 per cent in July, Statistics Canada said Tuesday, the slowest pace for price growth since March 2021.
StatCan said that deceleration in price hikes was “broad-based” last month, with lower prices for travel tours, passenger vehicles and electricity.
July figures follow an inflation rate of 2.7 per cent in June.
TD Bank director of economics James Orlando says that the latest figures are more proof that inflation is continuing to trend back towards the Bank of Canada’s two per cent target.
“It’s moving gradually, but it’s at what we consider to be much more palatable levels for Canadians, for central bankers,” he tells Global News.
“It opens the door for rate cuts to continue, which is going to provide much needed relief for Canadians.”
Gas prices put upward pressure on inflation last month, rising 2.4 per cent month-to-month.
Food inflation cooled somewhat, rising 2.7 per cent annually compared to 2.8 per cent in June.
The agency said that the shelter component of the consumer price index — a longtime thorn in the side of efforts to cool price pressures — eased to 5.7 per cent from 6.2 per cent the month previous, leading the decline in headline inflation. Rents, while still elevated, showed signs of cooling to 8.5 per cent in July from 8.8 per cent the previous month.
Prices on passenger vehicles have declined year-over-year in the past two months, with StatCan pointing to improved inventory helping to push down costs. Prices paid on new vehicles were up one per cent year-over-year while used car prices fell 5.7 per cent annually.
A recent AutoTrader report revealed that used car prices in particular are trending down as inventory levels improve after years of tight supply and buyer demand shifts back towards new vehicles.
Travel tours, accommodation and air transportation all saw year-over-year price declines in July, even as costs were rising month over month.
StatCan cited the base-year effect, which refers to the impact of price movements a year ago on the annual CPI figures, as helping to drive down inflation for travel tours and electricity in particular.
Orlando explains that because last year’s price spikes on segments such as travel are not falling out of the yearly calculations, the annual price comparisons seem softer.
He expects that the base-year effect will continue to dampen the CPI readings in August, providing more cooling winds for inflation.
“The message to Canadians is that the statistical nuances are moving in the favor of lower inflation and lower interest rates,” Orlando says.
July’s consumer price index data will be the Bank of Canada’s last look at the latest inflation trends before its upcoming rate decision slated for Sept. 4.
The central bank kicked off its interest rate easing cycle with back-to-back quarter-point rate cuts in June and July, bringing the policy rate down to 4.5 per cent after the most rapid tightening cycle in its history.
CIBC senior economist Andrew Grantham said in a note to clients Tuesday morning that the July inflation report keeps “the door to further interest rate cuts wide open.”
“With inflationary pressures fading away but concerns about the weakening labour market growing, we continue to forecast three further 25-basis-point cuts by the Bank of Canada at the remaining meetings this year,” he wrote.
Money markets also expect another 25-basis-point cut at the bank’s next rate announcement and are nearly pricing in a total of three more cuts this year, according to Reuters.
In addition to the headline figure dropping, July also marked further easing in the Bank of Canada’s preferred measures of core inflation.
RBC economist Claire Fan said in a note that the latest price data is “unequivocally weak,” and should quell concerns about “sticky inflation pressures” in Canada.
She said that the bar is “low” for more interest rate cuts this year, adding that RBC is also calling for another quarter-point cut in September.
One risk to the economy on the minds of market watchers is a looming work stoppage from Canada’s two biggest rail companies, which could begin as a strike or lock-out on Thursday.
Experts and industry groups have warned that a shutdown of Canadian railways would significantly impact the agricultural sector.
But Orlando notes that even if a strike or lockout does materialize, unless it stretches on for an extended period of time, it’s unlikely to dissuade the Bank of Canada from its rate cut path.
A work stoppage that’s “temporary” is likely to be unwound once workers return and goods start flowing again, he says, which does not warrant a monetary policy response even if it has a short-term impact on inflation or the wider economy.
“Any central banker would say that if something is temporary, you should look through it,” Orlando says.