Canada’s inflation rate finally hit the Bank of Canada’s target. What does that mean for prices?

Canada’s inflation rate decreased to two per cent in August, Statistics Canada reported on Tuesday, finally hitting the Bank of Canada’s target in its long campaign to cool price growth.

The central bank began aggressively hiking interest rates in April 2022 to tame skyrocketing inflation, and it made its first rate cut since March 2020 in June.

“Our confidence that inflation will continue to move closer to the two per cent target has increased over recent months,” Bank of Canada governor Tiff Macklem said at the time.

Last month’s two per cent rate marks the slowest pace of growth since February 2021. The Bank of Canada’s preferred core measures of inflation also ticked down a notch.

“Inflation remains unthreatening and the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate,” CIBC senior economist Andrew Grantham wrote in a note to clients.

“We continue to forecast a further 200 [basis points] of interest rate cuts between now and the middle of next year,” he said.

Inflation edged down in August mostly due to a drop in gasoline prices, which are considered volatile. When gasoline is excluded, the rate came in at 2.2 per cent.

The target was reached. What does that mean for prices?

Even as the Bank of Canada has hit its target, Canadians might not be feeling the impact of lower inflation when they’re shopping for groceries or other goods.

That’s because while the pace at which prices grow has slowed, they mostly remain elevated, said Pedro Antunes, chief economist at the Conference Board of Canada.

“The bank isn’t targeting for prices to come back down to where they were pre-pandemic or [before] that big inflation period. What they’re really looking for is, going forward, to have inflation stabilized,” he said.

For example, if a steak that used to cost $10 now costs $20, “that price of $20 that you’re now paying for your steak won’t increase at a rate any higher than two per cent.”

Antunes said there’s “no great science” behind the two per cent target, but there are two reasons for it.

“For one, it’s important to have low inflation and stable inflation so that we are not affecting people’s livelihoods,” he said. For people on fixed incomes, inflation needs to remain low enough that they maintain their purchasing power.

But the Bank of Canada doesn’t necessarily want to reach zero per cent inflation, because that can lead to negative inflation — also called deflation.

“Why is that bad? Well, if prices are dropping, people tend to hold off on purchases,” Antunes said. “And it can [kind of have] a negative impact on the economy.”

Mortgage interest, rental costs largest contributors

As has long been the case, mortgage interest and rental costs were the largest contributors to the consumer price index in August, though mortgage interest growth is slowing, the data agency noted.

Grantham, the CIBC economist, noted that if mortgage interest costs were excluded from overall inflation, the rate would have come in at 1.2 per cent year over year.

Consumers paid 2.4 per cent more for groceries in August, the result of what economists call a base-year effect — the impact of comparing prices in a given month to the same month a year earlier.

Meanwhile, the price of clothing and footwear declined, atypical during a back-to-school shopping month, and electricity prices grew at a slower pace.

The Bank of Canada will hold its next interest rate meeting on Oct. 23. Some economists say the question isn’t whether the central bank will cut, but whether the cut will be 25 basis points or 50.