By Randy Thanthong-Knight
(Bloomberg) — Canadian underlying price pressures eased, even as the headline rate quickened slightly, clearing the way for the central bank to resume cutting interest rates this week.
The consumer price index rose 1.9% from a year ago in August, up from July’s 1.7% increase, Statistics Canada data showed Tuesday. But the acceleration — which was slightly weaker than the median projection in a Bloomberg survey of economists — was mainly driven by gasoline prices that declined to a smaller extent last month than in July.
In fact, excluding gasoline, the index slowed to 2.4% in August, from 2.5% in each of the previous three months. On a monthly basis, the CPI fell 0.1%, while economists were expecting a flat reading.
The inflation report, released just a day before the Bank of Canada’s rate decision, shows that while underlying price pressures are still elevated, they aren’t worsening. That’s likely to give policymakers more confidence they can proceed with rate cuts to aid the tariff-hit economy.
Officials have kept borrowing costs unchanged at 2.75% for the past three meetings to assess the impact of President Donald Trump’s tariffs on Canadian inflation and economic growth. During their July deliberations, they debated rate cuts, with some members arguing further support would likely be needed given the softness in the economy, particularly if the labour market weakened further.
It appears that condition has been met. The two most recent labor reports showed employment losses in both July and August, totaling more than 100,000 positions, while the jobless rate hit 7.1% last month, up by half a percentage point since January. Second-quarter gross domestic product also shrank at a 1.6% annualized pace, the biggest decline since the pandemic.
Traders in overnight swaps cemented rate-cut bets following the release, fully pricing a 25 basis-point reduction on Wednesday. The two-year government bond yield fell a basis point to 2.480%, while the loonie traded at C$1.3759 per U.S. dollar as of 9:10 a.m. in Ottawa. The data were released at the same time as a U.S. retail report beat forecasts.
Recent economic weakness will likely outweigh the bank’s concerns about firm core inflation over the past few months. A broad range of underlying price pressures showed some cooling.
The average of the Bank of Canada’s two preferred core measures decelerated to 3.05%, from 3.1% in July. The three-month moving average of these core rates held steady at 2.52%.
Shelter inflation slowed to 2.6%, while CPI excluding food and energy decelerated to 2.4%. CPI excluding eight volatile components and indirect taxes held steady at 2.6%. Still, the share of components within the consumer price index basket that are rising 3% and higher — another key metric that policymakers are watching closely — rose to 39.1%, from 37.3% in July.
Future Cuts
“Inflation remained largely unthreatening in August, making the expected Bank of Canada interest rate cut tomorrow a relatively easy decision,” Andrew Grantham, economist at Canadian Imperial Bank of Commerce, said in a report to investors.
“With core measures of inflation likely to cool further in the months ahead thanks to the slack building up in the economy and the removal of many retaliatory tariffs on Sept. 1, we not only expect a 25 basis-point cut tomorrow but also a further reduction at the October meeting.”
Benjamin Reitzes, rates and macro strategist at Bank of Montreal, argued the report should have little bearing beyond the September meeting.
“The breadth of inflation improved a touch, but that doesn’t mean it’s time to signal the all-clear on inflation,” he said in an email. “Core inflation is still at 3%, and the Bank of Canada will need more evidence of slowing growth and inflation for them to cut in future meetings.”
What Bloomberg Economics Says…
“Amid a weakening labour market, the Bank of Canada will likely be less concerned with the monthly uptick in year-on-year inflation than with increasingly worrying downside growth risks.
After a downside surprise in second-quarter GDP, multiple weak labour surveys and now a downside surprise in inflation, we think the Bank of Canada has a strong argument for resuming rate cuts.”
— Stuart Paul, US and Canada economist
The central bank has argued previously that its two preferred core measures somewhat overstate underlying inflation and with the timelier three-month annualized rate unchanged, it probably sees core inflation as less concerning than it was a few months ago, Stephen Brown of Capital Economics said in a report to investors.
“Accordingly, the bank is likely to cut interest rates tomorrow and we expect further loosening later this year,” he said.
Out of 10 Canadian provinces, eight saw prices rising at a faster year-over-year pace in August compared with July. In Nova Scotia, in addition to gasoline, higher rent prices also contributed to the acceleration. Newfoundland and Labrador and Prince Edward Island were the two provinces where inflation rose at a slower pace last month.
–With assistance from Mario Baker Ramirez and Erik Hertzberg.
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Last modified: September 16, 2025