Canada's annual inflation rate fell to a 40-month low of 2.5% in July, in line with forecasts, and a measure of core inflation also eased, based on data released on Tuesday. This keeps the Bank of Canada on track to cut interest rates again in September.
Analysts polled by Reuters had forecast inflation to fall to 2.5% from 2.7% in June. The consumer price index rose by 0.4% on a monthly basis, also in line with forecasts, based on Statistics Canada data.
The decline in the headline inflation rate in July was largely driven by lower prices for package tours, passenger vehicles, and electricity, according to the statistics agency.
The inflation rate is now the closest to the central bank of Canada's 2% target since 2.2% inflation in March 2021, when prices started to rise after about a year of the pandemic.
The decline is expected to keep the Bank of Canada on track to cut borrowing costs again next month. The Bank of Canada has cut the policy rate at the last two consecutive meetings, bringing it down to 4.5%.
Money markets expect another 25 basis point cut at the bank rate announcement on September 4 and almost certainly expect three more rate cuts this year.
The Canadian dollar pared some gains after the CPI report with the CAD currency trading up 0.04% to 1.3628 against the US dollar or 73.38 U.S. cents. Bond yields for two-year Canadian government bonds fell 3.5 basis points to 3.416%.
After cutting key rates overnight last month, the BoC signaled its growing concerns about the possibility of weaker-than-expected growth.
The two main measures of core inflation monitored by the Bank of Canada CPI-median and CPI-trim fell to their slowest rates since April 2021. CPI-median fell to 2.4% from 2.6% in June, while CPI-trim fell to 2.7% from 2.8%.
Among the main drivers of the decline in inflation, prices for package tours fell 2.8% year-on-year in July after a 7.4% increase in the previous month. Passenger vehicles also became cheaper during the month, with prices falling at the fastest rate since November 2012.
Goods prices rose 0.3% year-on-year as in June while services inflation eased to 4.4% from 4.8%.
