Here’s what economists had to say about the latest inflation numbers

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The inflation rate finally reached the Bank of Canada’s target in August, easing to two per cent, its slowest increase since February 2021. Here’s what economists had to say about the news:

Policymakers should focus on cutting rates: CIBC

Senior economist Andrew Grantham said that with the inflation target achieved, policymakers should be focusing on cutting interest rates to stimulate the economy and prevent a material undershoot of the inflation target ahead.

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Even though much of the easing relative to July was due to lower gasoline prices, there was good news within core measures as well, Grantham said. He noted that the only area of price pressure remains shelter, and in particular rents and mortgage interest costs.

Clothing and footwear prices declined in August for the first time since 1971 items that generally see price increases due to back-to-school shopping. This could be an indication that weak demand left retailers with a stock overhang towards the end of the summer, he said.

With gasoline prices falling further into September, headline inflation should ease again in the next release and CPI, excluding mortgage interest costs, could well fall below one per cent, said Grantham.

“The bottom line then is that inflation remains unthreatening, the Bank of Canada should now focus on trying to stimulate the economy and halting the upward climb in the unemployment rate” he said, adding that he forecasts a further 200 basis points of interest rate cuts between now and the middle of next year.

Headline CPI on target at 2% is misleading: Scotiabank

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Derek Holt, head of Scotiabank Capital Markets Economics, cautioned against upsizing as core inflation picked up again in August over July. “Upsizing on the back of this data would be a policy misstep in my view,” said Holt.

While the Bank of Canada targets headline inflation of two per cent over the medium-term, it uses its core gauges in higher frequency fashion to operationalize the likely, durable achievement of this mandate, he said. Holt added that it’s unclear that underlying inflation has cooled fast enough to durably hit two per cent headline inflation.

He said pre-judging this by accelerating easing could reignite inflationary pressure especially as shelter, a key part of the basket, remains hot and could become hotter yet.

Holt said the central bank’s dovish reaction function may well upsize, but firstly, core inflationary pressures at the margin don’t support doing so, and it would be a dicey bet that growth doesn’t accelerate faster than potential GDP growth and resurrecting inflation risk.

Path to further Bank of Canada interest rate cuts is clear: RBC Economics

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Royal Bank of Canada economist Nathan Janzen said that while the pace of inflation was largely driven by lower gasoline and oil prices, broader underlying inflation pressures also showed further signs of easing.

Those broader inflation pressures look to be back around the two per cent inflation target, and interest rates are still at levels high enough to restrict economic growth and push price growth lower.

Janzen said the path to further Bank of Canada interest rate cuts is clear, as per-capita GDP is already down in seven of the last eight quarters and the unemployment rate up more than a percent from a year ago.

The economist expects a gradual rate cutting path of 25 basis points per meeting, down to a three per cent overnight rate with risks tilted to potentially larger cuts if the economy softens significantly further.

“Bullseye!:” TD Economics

Headline inflation is back on target and core measures keep grinding lower. TD senior economist James Orlando said these would be even lower if it weren’t for the outsized impact of high housing costs, which have weighed on the Canadian economy and slowed the pace of growth.

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“Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate,” he said.

He added that the current policy rate, even after 75 basis points in cuts over the last few months, is still nearly 200 basis points above where it should be given the current state of the economy. With that, odds of larger 50 basis point cuts are growing in futures markets.

Orlando said a number of Bank of Canada members speaking on the economy over the next few weeks will provide the bank plenty of opportunity to move market pricing towards its intended path.

Too early to declare ‘mission accomplished’ on inflation: Desjardins

Randall Bartlett, senior director of Canadian economics at Desjardins, said the August inflation rate points to a 50-basis point rate cut in October.

He said that while it’s probably still too early for cautious central bankers to declare “mission accomplished” on inflation, today’s news was a cause for celebration.

With headline inflation slowing sharply and landing right on the Bank of Canada’s two per cent target, it would appear that the central bank’s goal of returning to low and stable inflation is here, he added.

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Bartlett noted that the gradual rise in the unemployment rate and slowing pace of economic growth relative to the central bank’s most recent forecast suggest high interest rates are working to cool the economy, “in fact, maybe they’re working too well.”

As such, he said the Bank of Canada is likely to cut the policy rate by 50-basis points at its October announcement. After that, he expects it to return to its gradual pace of 25-basis point cuts, keeping the option open to accelerate the pace if warranted by economic conditions.

Not quite mission accomplished: Capital Economics

While headline inflation returned to the two per cent target in August, it’s “not quite mission accomplished,” said Stephen Brown, deputy chief North America economist at Capital Economics.

This easing was mainly due to favourable base effects and will be brief, Brown said, forecasting that inflation is set to rise back to 2.5 per cent in the fourth quarter.

Nonetheless, he said the details of the August release provide further evidence that the inflation battle is “almost won,” and will serve to increase speculation that the central bank might soon cut by a larger 50 basis points.

While both headline and core inflation are now on track to average 0.1 per cent less than the central bank anticipated this quarter, that alone will not be enough to persuade it to cut by 50 basis points at its next meeting, Brown said. However, it leaves the door open to a larger move if the bank becomes more concerned about the downside risks to the economic outlook, he added.

• Email: dpaglinawan@postmedia.com

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