Inflation rate nudges down to 1.9% as gasoline and vegetables got cheaper

Posted by Teresa Mardon on Sunday, September 29th, 2019 at 11:36am.

Canada's inflation rate cooled to a 1.9 per cent annual rate in August, Statistics Canada says, as the price of gasoline, fresh vegetables and fruit all got cheaper during the month.

August's rate came in 0.1 percentage point below July's level.

After bottoming out at 1.4 per cent in January, Canada's inflation rate has been at 1.9 per cent or above for six months in a row now.

Cheaper gasoline was one of the biggest factors in the cooling, as gasoline was 10 per cent cheaper in August 2019 than it was the same month a year earlier. The impact of that cheaper gas is so great that if gasoline is stripped out of the data, Canada's inflation rate would have been much higher — 2.4 per cent.

Canadians also paid 6.5 per cent less for fresh vegetables in August compared with July, marking the largest month-over-month decline in five years. 

The price of a hotel room also fell, as the cost of traveller accommodation has fallen by 6.7 per cent in the past year. Travel accomodation costs have now fallen on an annualized basis for 14 months in a row.

On the flipside, the price of some things increased, which helped keep the overall inflation rate up. They include air fare, which has risen by 10.3 per cent in the 12 months up to  the end of August.

Natural gas prices have also risen by 5.8 per cent during that time frame.

All things being equal, a lower inflation rate means that the Bank of Canada should be less likely to cut its rate in the near future, since it's a sign the economy isn't overheating. Currently, trading in investments known as overnight index swaps implies there's about a 1 in 5 chance of a rate cut from the Bank of Canada when it meets next month.

Despite the relatively benign inflation rate, economist James Marple at Toronto-Dominion Bank expects the bank will have to cut its rate eventually, because trade war tensions are making most central banks nervous.

"We would not be surprised to see the Bank take out some insurance in the form of a rate cut later this year, moving it closer to the majority of its advanced economy peers," he said.

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