Experts predict that the Bank of Canada will rely on a significant economic slowdown this fall to prevent inflation from rising further. The central bank has made progress in reducing headline inflation, with economists estimating that the consumer price index report from Statistics Canada will show a 2.9% annual inflation rate, down from 8.1% last summer. However, this relatively tame inflation rate is partly due to the “base-year effect,” which will no longer be factored into the annual calculations. RBC’s assistant chief economist, Nathan Janzen, explains that one reason inflation may have increased slightly in July is the recent rise in gas prices. While prices at the pump have gone up, they are still lower than last summer’s peaks. Janzen notes that the base-year effect can create the illusion of lower inflation, as prices are still high for families, households, and businesses. As the base-year effect diminishes, inflation could rise again in the coming months. However, the Bank of Canada is expected to receive support in its fight against inflation due to its interest rate hikes. Many economists anticipate a slowdown in the economy this fall, which would decrease spending demand and alleviate inflation pressure. This, coupled with the Bank of Canada’s focus on core inflation measures and shorter-term pricing momentum, may keep annual inflation within the targeted range of one to three percent. If core inflation measures show signs of increasing, the Bank of Canada may need to consider raising interest rates. The bank’s primary mandate is to achieve low and stable inflation, so they will respond accordingly if necessary.
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