Forecasters are predicting that the upcoming consumer price index (CPI) report will reveal an increase in inflation for last month, signaling a shift in progress after a year of steady declines. In June, Canada’s annual inflation rate fell to 2.8 percent, returning to the country’s target range for the first time since March 2021. However, economists believe this victory against high inflation will be short-lived, as underlying price pressures indicate that it will take time for inflation to reach the two percent target.
“I think the report will serve as a reality check for everyone, including the Bank of Canada, that the easy phase is over and now the hard work begins,” said Douglas Porter, BMO’s chief economist. Both BMO and CIBC expect inflation to reach 3.1 percent in July, primarily due to higher gasoline prices. Similarly, the US experienced a similar increase in inflation last month, with its annual rate rising from 3.0 percent in June to 3.2 percent.
While lower gasoline prices contributed to the decline in inflation over the past year, rising prices may start to contribute to inflationary pressures. Porter believes that gasoline prices could go from being a drag on inflation to being close to neutral or even contributing to inflation in next month’s report. The Bank of Canada likely won’t be completely surprised by a rise in inflation in July’s report. The bank’s most recent forecasts anticipate inflation to hover around three percent over the next year before gradually declining to two percent by mid-2025.
As a result of these projections, the Bank of Canada’s governing council decided to raise rates by a quarter of a percentage point in July, aiming to bring down inflation faster. The bank’s key interest rate now stands at 5.0 percent, the highest since 2001. Although Porter doesn’t expect the bank to raise rates again in September, he acknowledges that it’s difficult to rule out another rate hike.
Both economic growth and the labor market have performed as expected this year. However, signs of softening are starting to emerge. The labor market is no longer as tight as it was last year, with the unemployment rate on the rise. Over the past three months, the rate has increased from 5.0 to 5.5 percent. Given this trend, economists anticipate unemployment to continue rising, which may pose a challenge for the central bank when deciding on further interest rate hikes.
While many economists share Porter’s belief that interest rates will not continue to rise, CIBC’s Andrew Grantham expects another rate hike. He suggests that the Bank of Canada may lean toward the risk of doing too much and would prefer to bring inflation back to target sooner rather than later. The central bank’s next interest rate decision is scheduled for September 6th.
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