Inflation expected to drop in July, giving BoC reason to cut

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The Bank of Canada is expected to cut its policy rate at its next meeting in September, something that will become even more likely if economists’ predictions that inflation continued to cool last month come true.

Statistics Canada is set to release its consumer price index (CPI) data for July on Tuesday.

Inflation decelerated in June to 2.7 per cent annually, with the drop attributed to a slowdown in gasoline prices. Despite an uptick to 2.9 per cent in May, inflation has followed a cooling trend and has remained within the target range of one to three per cent since the beginning of this year.

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The Bank of Canada expects core inflation, the measures it prefers to look at when making its policy decisions, to fall to 2.5 per cent in the second half of this year.

Except for Royal Bank of Canada, economists predict Tuesday’s reading will show inflation fell in July. However, there is a lack of consensus on the exact number.

Toronto-Dominion Bank puts annual inflation at 2.4 per cent in July. Fédération des caisses Desjardins du Québec and the Canadian Imperial Bank of Commerce put headline inflation at 2.5 per cent and the Bank of Montreal forecasts it only fell to 2.6 per cent last month.

“The share of CPI components growing above three per cent is closing in on normal levels, which is encouraging, and should help the Bank of Canada’s preferred measures of underlying inflation make further progress,” Jimmy Jean, chief economist at Desjardins, said.

Andrew Grantham, a senior economist at CIBC, said there will be monthly price increases, but those will be offset by the absence of higher gasoline prices from a year ago.

“We expect a 0.4 per cent increase in prices on the month, which would translate into a 0.3 per cent gain in seasonally adjusted terms (the strongest since March),” he said in a note to clients. “However, despite this firm monthly gain, the annual pace of inflation is still likely to slow as a larger increase in gasoline prices a year ago drops out of the calculation.”

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Jean said the last mile of the inflation story is about stubbornly high shelter costs. Shelter inflation declined slightly in June to 6.2 per cent, from 6.4 per cent in May. Mortgage interest costs remained the largest contributor to annual inflation in June at 22.3 per cent and rent inflation was at 8.8 per cent for the same month.

RBC predicts inflation to remain steady at 2.7 per cent.

“The easing of Canadian inflation pressures has slowed in recent months,” Nathan Janzen, assistant chief economist at RBC, said in a note to clients.

He said even a steady inflation reading on Tuesday shouldn’t prevent another rate cut in September.

The central bank’s next rate announcement is scheduled for next month, with economists predicting another rate cut of 25 basis points.

“Based on what we know about what’s happening with inflation and the fact that it’s behaving quite well, it’s become less of a concern for the Bank of Canada,” said James Orlando, director of economics at TD. “The concern was that they should go slow with respect to rate cuts, because they were worried inflation was going to perk back up, but everything we’ve seen in inflation is the opposite of that.”

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Orlando said rates remain too high and need to come down to encourage sustained economic growth and avoid significant job losses. The unemployment rate ticked up to 6.4 per cent in June.

“While the Bank of Canada would prefer to see a further deceleration, especially with somewhat favourable base effects, steady core inflation won’t prevent another cut at the early-September policy announcement,” Benjamin Reitzes, an economist at BMO, said in a note. “Fortunately, there’s an even more favourable base effect next month, suggesting we’ll get at least one friendly reading ahead of the October Bank of Canada meeting.”

Last month, Bank of Canada governor Tiff Macklem said the economy continues to be in excess supply and signalled a more dovish stance, voicing concerns that inflation could fall too far.

“We need growth to pick up so inflation does not fall too much, even as we work to get inflation down to the two per cent target,” he said during the bank’s last policy rate announcement.

• Email: jgowling@postmedia.com

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