Canadian Inflation More Muted Than Expected, Giving the Green Light for BoC Easing Tomorrow
The Consumer Price Index (CPI) rose 1.9% on a year-over-year basis in August, up from a 1.7% increase in July.
Gasoline prices fell to a lesser extent year over year in August (-12.7%) compared to July (-16.1%), resulting in faster growth in headline inflation. Excluding gasoline, the CPI rose 2.4% in August, following increases of 2.5% in each of the previous three months.
Moderating the acceleration in the all-items CPI were lower prices for travel tours and fresh fruit compared with July.
The CPI decreased by 0.1% month-over-month in August. On a seasonally adjusted monthly basis, the CPI was up 0.2%.
Yearly, gasoline prices fell 12.7% in August, compared with a 16.1% decline in July. The smaller year-over-year decrease was partially due to a base-year effect. In August 2024, gasoline prices declined 2.6% month over month, as concerns about slower economic growth began to emerge. In August 2025, prices rose 1.4% month-over-month, primarily due to higher refining margins that offset lower crude oil costs.
Prices for cellular services fell to a lesser extent year over year in August (-1.2%) compared with July (-6.6%). Monthly, prices were up 1.5% in August, as multiple providers increased prices with fewer back-to-school sales available for cellular phone plans.
Partially offsetting the price increase were lower prices month over month for multipurpose digital devices (-1.5%), which include smartphones and tablets.
Grocery price inflation remains a thorn, up a tick to 3.5% y/y (and partly explains the gap between the BoC’s 3% core measures and the more benign 2.4%). In August, prices for meat rose 7.2% year-over-year, following a 4.7% increase in July. Prices for fresh fruit fell 1.1% in August, after increasing 3.9% in July. Price declines for grapes, other fresh fruit, and berries (including cherries) contributed the most to the yearly price decrease for fresh fruit in August.
Prices for clothing and footwear rose 1.7% year-over-year last month, compared with a 0.8% increase in July. The increase in August was primarily due to a base-year effect, as prices declined by 0.6% in August 2024.
Year over year, prices for travel services decreased 3.8% in August, following a 1.2% decrease in July.
Shelter cost trends are now more favourable, as sagging home prices and a rare lull in home insurance costs cut owned accommodation by 0.1% month-over-month for a second consecutive month; this had not occurred since 2020. Rent remains the single most significant driver of overall inflation, although it cooled to 4.5% y/y (from 5.1%) and seems headed lower.
Core inflation was largely as expected, with most major measures rising a moderate 0.2% m/m in adjusted terms, but keeping the Bank of Canada’s preferred gauges locked around the 3% y/y pace. Median held steady at 3.1% y/y, while trim eased a tick to 3.0%.
However, the shorter-term metrics on most of the core indices were more favourable, as the three-month trend on trim and median averaged 2.5%. Recall that the BoC has recently suggested underlying inflation trends are around 2-1/2%, and even the ex-food and energy component chimed in with a 2.4% year-over-year clip, with the three-month trend easing to just 1.6%. (For reference, U.S. ex food & energy CPI was 3.1% y/y last month.)
On the trade war watch, goods excluding energy and groceries eased slightly to a 1.7% year-over-year pace from 2.0% in July. That’s still a bit hotter than the pre-pandemic norm, but less than half the pace seen during the pandemic inflation scare of 2022/23. Auto prices had been leading the way higher in recent months, but they cooled slightly to 4.0% y/y, from 4.5% the prior month.
Bottom Line
This report showed inflation measures rising no more than a tame 0.2% month-over-month (m/m) in seasonally adjusted terms. That pace won’t cause the Bank of Canada much stress, thus keeping them on track for a rate cut at tomorrow’s decision.
The milder underlying short-term trends in core, alongside the recent weakening in employment, bode well for further rate relief this fall. However, we suspect the Bank will continue to take it one meeting at a time, restrained by the 3% year-over-year trends in some core measures, as well as the likelihood that headline inflation will rise, at least temporarily, in next month’s report due to base effects.
Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres
drsherrycooper@