Citi analysts pointed out that Canada’s Headline Consumer Price Index (CPI) decline of 0.2% month-on-month in August, aligning with a year-on-year return to 2.0%, was unexpected and below both its and consensus forecasts, which anticipated a flat reading for the month.
Core inflation measures also showed a downward trend, with the three-month core inflation rate settling at 2.4%, consistently within the target range for several months.
August’s CPI reduction was driven by notable decreases in the prices of discretionary goods and services, including public transportation, recreation, clothing, and communications.
The trend suggests a softening in consumer demand, which may influence the Bank of Canada’s (BoC) assessment of inflation risks. The BoC has been keenly observing downside risks to inflation, which could be exacerbated by diminished demand.
Citi anticipates that the BoC will likely revise its growth forecasts downward in the upcoming October Monetary Policy Report. This revision, along with the soft inflation data, is expected to prompt the BoC to reduce interest rates by 50 basis points on October 23. The decision is anticipated regardless of whether the Federal Reserve opts for a 25 or 50 basis point cut in their meeting tomorrow.
Despite the overall weakness in the August CPI, shelter inflation showed some resilience, with rent prices rebounding by 1% month-on-month after a subdued performance in June and July. However, Citi analysts caution that this component could remain volatile and may not sustain the strength seen in previous years, particularly with the potential impact of new immigration limits on population growth by 2025.
While core inflation has softened in recent months, Citi notes the risk of some persistence in core inflation over the next three to four months. This view is supported by indicators such as the Canadian Federation of Independent Business’s (CFIB) survey on business price plans, which remain somewhat elevated. Nevertheless, the risks appear skewed towards the possibility of further significant rate cuts as economic activity in both the United States and Canada shows signs of further weakening.
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