Inflation cools sharply to 2% in August, hitting Bank of Canada’s target

According to Statistics Canada, annual inflation dropped significantly to two per cent in August, marking a key achievement in the Bank of Canada’s efforts to control rising prices.

This represents a notable decrease from July’s 2.5 per cent rate and continues the overall cooling trend observed throughout 2024.

The last time inflation was at or below two per cent was in early 2021.

Statistics Canada attributed the decline in August’s inflation rate mainly to lower gasoline prices. Without the drop in gas prices, inflation would have been 2.2 per cent for the month, according to StatCan.

Grocery prices, on the other hand, increased by 2.4 per cent year-over-year in August, up from 2.1 per cent in July, largely due to comparisons with notable price changes during the same period last year.

However, on a month-to-month basis, grocery prices fell 0.2 per cent from July to August, with StatCan noting seasonal declines in fresh vegetable costs as the primary reason.

The Bank of Canada’s goal, according to its mandate, is to achieve two per cent inflation by adjusting its benchmark interest rate. The central bank views this level of annual price growth as providing stability for households making financial decisions.

Beginning in March 2022, the Bank of Canada rapidly raised interest rates to address inflation, which had surged to 40-year highs. Recently, the central bank has begun lowering rates with increased confidence that price pressures are now under control.

Attention among Canada’s monetary policymakers has shifted toward concerns that inflation might fall too far below the two per cent target, especially amid signs of weakening in the labor market and broader economy.

CIBC senior economist Andrew Grantham, in a note on Tuesday, suggested that inflation could dip below two per cent in September if gas prices continue to decrease. He also predicted that a further 200 basis points of interest rate cuts could occur by the end of the year, bringing the policy rate to 2.25 per cent, as a measure to boost the economy.

“The bottom line is that inflation remains unthreatening, and the Bank of Canada should now concentrate on stimulating the economy and halting the rise in the unemployment rate,” Grantham wrote.