Economists forecast an increase in the consumer price index (CPI) for the past month, which would be a reversal of the situation after the decline of the last 12 months.
In June, the inflation rate was 2.8%, within the Bank of Canada’s target range, a first since March 2021.
However, this victory could be short-lived. Price pressures suggest that it will still take time before the inflation rate returns to the 2% target.
“This is going to be a hard reality check for everyone, including the Bank of Canada. We have passed the easy phase. It’s time to roll up our sleeves,” said Douglas Porter, chief economist at the Bank of Montreal (BMO).
Like BMO, CIBC forecasts that inflation for the month of July was 3.1%, due in large part to gas prices.
Inflation also rose in the United States in July, rising from 3% to 3.2%.
Mr. Porter points out that the decline in gasoline prices has contributed to the decline in inflation over the past year, but if they start to climb again, this could create new inflationary pressure.
An increase in inflation in July will not take the Bank of Canada by surprise.
Its most recent forecast indicated that it expects the inflation rate to hover around 3% over the next few months before receding towards 2% in the middle of 2025.
These projections had prompted the central bank to raise its key rate by a quarter of a point last month.
It now stands at 5%, a peak since 2001.
Porter doesn’t expect the Bank of Canada to do it again in September.
“But I have to honestly admit that we thought the Bank of Canada was done with raising its policy rate after the January one. So, never say never. »
While economic growth and the labor market have met expectations since the start of the year, signs of a slowdown are on the horizon.
For example, the unemployment rate is on the rise. Over a three-month period, it went from 5% to 5.5%.
Mr. Porter said that this situation should encourage the Bank of Canada to slow the increase in its key rate, especially since economists anticipate a further increase in the unemployment rate.
“It’s a tough decision to make to keep raising interest rates when unemployment is on the rise,” he said. It would not be wise to raise interest rates with the movement we have seen in the job market over the past few months. »
While many economists share Mr. Porter’s view, this is not the case with CIBC’s managing director and chief economist, Andrew Grantham.
“One of the reasons we believe that the Bank of Canada would announce another increase in interest rates is its tendency to want to do too much,” he says. It prefers to bring inflation back to its target sooner than later. »
The Bank of Canada is expected to announce its decision on this on September 6.