Pace of Price Growth Moderated Further in July

Key insights

Consumer price inflation continued to moderate in July. The pace of CPI growth slowed to 2.5 per cent on a year-over-year basis.Gasoline prices were higher than at the same time last year and many shelter components continued to add upward pressure. But the deceleration received support from easing prices for a broad array of goods and services, including telephone services, passenger vehicles, digital computing equipment, and travel tours.

Indicators suggest that inflation will continue to ease gradually into next year. The persistence of price growth for services remains an overarching concern, particularly for shelter components like rent. Prices for rent and services in general decelerated modestly in July, however. Wage growth, which feeds into the prices of many other services, remains elevated and is out of step with labour productivity growth. However, some of the motive force behind strong wage growth is weakening. The job vacancy to unemployment ratio, for example, has normalized, suggesting that the pace of wage growth will moderate. Some catching up of wages is still to be expected, however, and service price growth will likely continue to fall only gradually. For goods, improving supply chain conditions has been one of the most positive inflation stories in the last few years, helping the price of many goods to ease. The impending rail strike in Canada could disrupt that trend and add some upward pressure to inflation but the severity of its impacts would hinge on the strike’s duration.

Today’s inflation report supports the Bank of Canada’s dovish turn. Headline and core inflation eased further, and even shelter costs (which remain a concern for the Bank) decelerated in July. Considering recent trends, the Bank has shifted some of its language for describing the inflation outlook. Most significantly, officials recently acknowledged the importance of focusing on the symmetry of risks to the inflation outlook; namely, the upside and the downside risks. However, while the Bank cut its policy interest rate in June and July, rates remain firmly in contractionary territory. As inflation narrows in on the 2 per cent target, more easing is possible in September.