Canada’s inflation rate continued its downward trend, reaching the lowest level seen in over three years. July’s consumer price index (CPI) data shows a significant easing, suggesting that the Bank of Canada’s efforts to curb inflation might be paying off. The CPI rose by just 0.4% in July, largely driven by a rise in gasoline prices, according to Statistics Canada.
The year-over-year inflation rate cooled to 2.5% in July, marking the softest reading since early 2021. This downward trend aligns with what economists had anticipated. Core inflation, which excludes the more volatile food and energy sectors, also saw a slight increase, rising by 2.7% annually. Despite this, core prices showed signs of easing, offering some relief to the central bank.
This consistent drop in inflation extends the downward streak that began after inflation peaked above 8% in mid-2022. Such high inflation levels had prompted the Bank of Canada to increase interest rates aggressively. Now, headline inflation has remained within the central bank’s desired 1% to 3% range for seven consecutive months, a promising sign for the Canadian economy.
The Bank of Canada recently lowered its policy interest rate for the second time in two months, signaling optimism that inflation could hit the 2% target by the second half of next year. Although economic growth remains sluggish, the central bank is hopeful that inflation will continue to cool down sustainably.
Meanwhile, in the United States—Canada’s largest trading partner and export market—inflation has also eased. July’s inflation rate in the U.S. was 2.9%, the lowest since 2021. This trend suggests that the Federal Reserve may also cut interest rates in the near future, potentially influencing economic policies in Canada.
Two key measures of underlying inflation closely monitored by the Bank of Canada—the weighted median and trimmed mean CPI—also cooled to their lowest levels since April 2021. These indicators showed an average increase of 2.55% in July, down from 2.7% in June. This suggests that inflation pressures may be easing across the board, giving policymakers more room to maneuver.
Despite this, shelter costs remained the largest contributor to overall inflation in July. Although the rise in shelter costs has decelerated, mortgage interest costs were still up by 21% compared to a year ago, while rent increases softened to 8.5%. These high costs continue to weigh heavily on Canadians’ wallets.
In other sectors, Canadians saw some relief. Passenger vehicle prices fell last month, thanks to improved inventories compared to the previous year. Additionally, prices for travel-related services, including travel tours, decreased, largely due to last year’s spike when Canada experienced its first summer free of COVID-19 restrictions.
With inflation slowing and the central bank’s policies showing signs of effectiveness, Canada’s economic outlook appears brighter. However, the path to sustained economic stability will depend on ongoing adjustments to both domestic and international economic conditions.
