Inflation slowed to two per cent in August, hitting the Bank of Canada’s target and adding to the case for more aggressive interest rate cuts.

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The reading was the slowest increase in the consumer price index since February of 2021, and economists say it increases the odds of a 50-basis-point cut at the central bank’s next meeting in October.

“Inflation continues to validate the need for the Bank of Canada to continue cutting its policy rate,” said James Orlando, senior economist with Toronto-Dominion Bank, in a note to clients.

“We calculate that the current policy rate is still nearly 200 basis points above where it should be based on the current state of the economy.”

Economist David Rosenberg, founder and president of Rosenberg Research & Associates Inc., said much will depend on what the U.S. Federal Reserve does at its meeting Wednesday and data that comes down before Oct. 23.

“But the complete lack of any inflationary concerns at a time when the labour market is cracking up like an April ice sheet makes the case for a more aggressive easing policy very persuasive,” he said in a note to clients.

August’s deceleration was driven mainly by a drop in gasoline prices, which decreased by 5.1 per cent year-over-year, after an increase of 1.9 per cent the month before. Statistics Canada attributed this to base effects and lower oil prices.

The biggest contributors to inflation remain shelter costs. Mortgage interest costs grew by 18.8 per cent in August, a slower pace than the year before when they jumped by 30.9 per cent. If mortgage interest costs were excluded from the consumer price index basket, the inflation rate would be 1.2 per cent.

Core inflation measures, which the Bank of Canada prefers, continued to ease in August. CPI-common came in at two per cent, CPI-median decelerated to 2.3 per cent and CPI-trim sits at 2.4 per cent, all within the central bank’s target range.

Stephen Brown, deputy chief North American economist at Capital Economics, said the lower inflation rate in August was mainly driven by base effects and he expects it will rise back to 2.5 per cent in the fourth quarter.

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

Bank of Canada governor Tiff Macklem left the door open for steeper cuts if “growth does not materialize as expected,” in an interview with the Financial Times last week.

• Email: jgowling@postmedia.com

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