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

Annual inflation cooled sharply to two per cent in August, according to Statistics Canada, marking a major milestone in the Bank of Canada’s efforts to tame price pressures.

That’s sharply lower than the 2.5 per cent annual rate recorded in July and continues a general cooling trend through 2024.

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

Statistics Canada pointed to cheaper prices on gasoline as driving down the headline inflation figure in August. Without the drop in gas prices, annual inflation would’ve been 2.2 per cent in August, StatCan said.

Grocery prices rose 2.4 per cent annually in August, up from 2.1 per cent in July, mostly because of comparisons to sizeable price movements the same time last year.

On a monthly basis, grocery prices were down 0.2 per cent from July to August, StatCan noted, thanks largely to seasonal drops in fresh vegetable costs.

The Bank of Canada’s sets its benchmark interest rate in an effort to achieve two per cent inflation, according to its mandate, with the view that a two per cent rate of annual price growth provides stability for households making decisions.

The central bank hiked its benchmark rate rapidly starting in March 2022 as inflation soared to 40-plus-year highs, but has since started to adjust rates lower with growing confidence that price pressures are back under control.

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Focus among monetary policymakers in Canada has lately started to shift to fears that inflation will drop too far below two per cent amid signs of weakness in the labour market and wider economy.

CIBC senior economist Andrew Grantham said in a note Tuesday morning that with gas prices continuing to fall thus far in September, inflation could well drop below two per cent this month.

He projects that a further 200 basis points of interest rate cuts are in store between now and the end of the year, bringing the policy rate to 2.25 per cent, in an effort to kickstart the economy.

“The bottom line then is that inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” he wrote.

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