Economist: US inflation softening could be good news for Canada

The trend could open the path towards a less burdensome rate hike by the Bank of Canada

Economist: US inflation softening could be good news for Canada

A deceleration in the US inflation numbers might bring good tidings for Canada, a new analysis has suggested.

“The biggest surprise was the decline in [US] core inflation, which excludes food and energy prices,” said economist Sherry Cooper. “The shelter index continued to rise but did post a smaller increase than the prior month, increasing 0.5% in July compared to 0.6% in June. The rent index rose 0.7%, and the owners’ equivalent rent index rose 0.6%.”

This housing-fuelled softening will give the US Federal Reserve some much needed leg room.

“Fed officials have said they want to see months of evidence that prices are cooling, especially in the core gauge,” Cooper said. “They’ll have another round of monthly CPI and jobs reports before their next policy meeting on Sept. 20-21.”

With a 50-basis-point increase in the US next month now becoming more likely than a 75bp hike, Canada’s latest CPI numbers – scheduled for release on Aug. 16 – will be a crucial guidepost for the central bank’s near-future policy stance.

Read more: Economists: Canada’s deceleration to last for a prolonged period

“If the data show a dip in Canadian inflation, as I expect, that could open the door for a 50bp rise (rather than 75bp) in the Bank of Canada rate when they meet again on September 7,” Cooper said. “That is particularly important because, with one more policy rate hike, we are on the precipice of hitting trigger points for fixed payment variable rate mortgages booked since March 2020, when the prime rate was only 2.45%.

“The lower the rate hike, the fewer the number of mortgages falling into that category.”