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Consumer price index reading on inflation slows in Canada


Kevin Carmichael: But it’s still well above the Bank of Canada’s 2% target

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Statistics Canada’s consumer price index — the measure that the Bank of Canada uses to guide monetary policy; that employers and workers use to negotiate wages and salaries; and that public servants use to adjust government programs — increased 7.6 per cent from July 2021, compared with 8.1 per cent the previous month, representing the first deceleration since June 2021.  Here’s what you need to know:

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It’s all gas

The deceleration in year-over-year inflation was mostly the result of lower gasoline prices, which increased 35.6 per cent from July 2021, compared with 54.6 per cent the previous month.

Otherwise, upward price pressures remained elevated. Excluding gasoline, Statistics Canada’s aggregation of hundreds of prices increased 6.6 per cent compared with 6.5 per cent in June, an indication that inflation has spread across the economy.

Prices for food purchased in stores rose 9.9 per cent on the year, compared with 9.4 per cent in June, led by bakery prices, which are heavily influenced by the price of wheat, which will almost certainly remain elevated, given the supply issues that have resulted from Russia’s invasion of Ukraine.

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Inflation slowed considerably month to month, as the consumer price index increased only 0.1 per cent from the previous, after surging 1.4 per cent between May and June.

Still, the pervasiveness of inflation is a concern. Because oil has such an outsized influence on the headline number, the Bank of Canada watches three “core” measures of inflation that attempt to smooth volatility. On average, those measures increased 5.3 per cent in July from a year earlier, compared with 5.2 per cent in June. That’s too fast for the central bank, which targets inflation of two per cent and attempts to keep year-over-year increases in the consumer price index within a zone of one per cent to three per cent.

Interest rates bite

The Bank of Canada’s interest rate increases appear to be working. The 2.25-percentage-point increase in the benchmark rate since March was going to be felt in the housing market first. The price drops are now rippling through the broader economy, albeit slowly. Statistics Canada’s measure of what it would cost homeowners to replace their houses increased 9.1 per cent from July 2021, down from 10 per cent the previous month.

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However, higher mortgage rates are increasing demand for rental units, which are in short supply in many major cities. Rent increased 4.9 per cent last month from a year earlier, compared with 4.3 per cent in June, the biggest jump since the fall of 1989. “Weakening housing markets may keep upward pressure on this component,” Derek Holt, an economist at Bank of Nova Scotia, said in a note to his clients.

There’s one thing that’s cheaper

In June, Prime Minister Justin Trudeau said this: “Our answer to inflation, for example, is what we fought on in the last election, which was $10 a day child care right across the country. And that’s one of those things that we actually are delivering right now.”

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The prime minister was reaching. Child care is an important cost for thousands of families, but it overall, it affects a relatively small number of people. Still, there’s evidence the billions of dollars the Trudeau government pledged to create a national daycare system is helping on the margin. The cost of child care dropped 7.6 per cent from July 2021, the biggest decrease on record.

Bottom line

Canada’s economy is slowing, and price pressures appear to be easing at the same time. That suggests economic dynamics are working as you’d expect: commodity prices, which respond to expectations of global demand, adjusted to reflect higher interest rates and the possibility of a global recession; and the cost of goods and services got ahead of increases in disposable income, destroying demand for non-essentials.

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The Bank of Canada will be relieved that we avoided double-digit inflation, but governor Tiff Macklem, after conceding that he probably waited too long to begin raising interest rates, will be inclined to err on the side of crushing inflation. That means higher interest rates.

Inflation slowed, but to a pace that is still well in excess of the central bank’s two-per-cent target. Macklem in July indicated he probably will have to push the benchmark rate beyond three per cent to get price pressures under control. The benchmark rate is currently 2.5 per cent.

“Tuesday’s inflation number offers a bit of relief, but unfortunately, it will take some time before inflation is back to normal,” Macklem wrote in the National Post. “We know our job is not done yet — it won’t be done until inflation gets back to the two per cent target.”

• Email: | Twitter: carmichaelkevin

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