TORONTO – Canada’s annual  consumer price index is expected to fall to its lowest level since March 2021: ahead of the release of Statistics Canada’s inflation, due Tuesday, economists polled by Reuters expect the report show that prices rose 2.1% from a year ago, down from 2.5% in July.

Such expectations would put the headline inflation rate just above the Bank of Canada’s 2% inflation target. The continued progress in slowing inflation comes as the central bank itself has signaled its willingness to accelerate cuts to the key rate if circumstances warrant.

The Bank of Canada cut its key rate by a quarter of a percentage point earlier this month – the third consecutive cut – to 4.25%. Governor Tiff Macklem said the decision was motivated by falling inflation, noting that if the CPI in the future “were significantly weaker than we expected… it might be appropriate to take a bigger step, something bigger by 25 basis points”. On the other hand, Macklem said that if inflation were instead stronger than expected, the bank could slow the pace of rate cuts. But inflation has remained below 3% since January and fears of a reacceleration of price growth have receded as the economy has weakened.

Experts’ forecasts, for now, are that the central bank will reduce the key rate by a quarter of a percentage point at each meeting until July 2025, bringing it to 2.5% by that date. This forecast also comes after data released last week showed Canada’s unemployment rate rose to 6.6% in August from 6.4% in July. Despite this, it is possible that the central bank could accelerate the rate cutting cycle if inflation continues to decline.

Housing costs remained the main driver of inflation, with high rents and mortgage payments. Excluding real estate costs, experts say inflation in both Canada and the United States would hover slightly above 1%. So, in reality, the only thing keeping Canadian inflation above 2% is housing costs, which will likely start to decline. Hopefully.

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