Canada reported another round of weaker-than-expected inflation data, with the annual headline CPI slowing from 2.5% to 2.0% in August, marking the lowest level since February 2021. On a monthly basis, headline CPI decreased by 0.2%, compared to expectations of no change and the previous 0.4% rise. Meanwhile, core CPI fell by 0.1% month-over-month, and the annual core CPI declined from 1.7% to 1.5%, in line with forecasts.
Other inflation measures also fell short of expectations, with the trimmed CPI dropping from 2.7% to 2.4% year-over-year, and the common CPI dipping from 2.2% to 2.0%, compared to projections of no change.
The report showed that the slowdown in headline CPI was mainly driven by lower gasoline prices in August, despite rising rent and mortgage interest costs. Declines in air transportation, travel tours, and clothing and footwear prices also contributed to the softer monthly figures.
However, food prices continued to rise, with consumers paying 2.4% more for groceries in August, up from a 2.1% increase in July. This was attributed to a base-year effect, with dairy prices surging 3.3% year-over-year and fresh fruit becoming 1.5% more expensive compared to August 2023..
Market Reactions:
Canadian Dollar vs. Major Currencies: 5-Minute Chart
The Canadian dollar, which had been trading in narrow ranges against its forex counterparts in the hours leading up to the CPI release, saw sharp movements in various directions following the weaker-than-expected inflation data.
CAD surged higher against the yen, which was already on slightly weaker footing just before the inflation report. The Loonie also gained against the NZD, CHF, and AUD. Additionally, it rebounded against the USD, which had sold off prior to the report as traders likely adjusted their positions ahead of the U.S. retail sales data release.
Although the Canadian dollar initially dipped against the euro and sterling when the CPI numbers were published, it quickly regained strength, holding on to its gains and more in the following hours. Meanwhile, the Aussie trimmed its losses against the CAD about an hour after the report.
