Canada’s inflation data for August 2025 shows that the Consumer Price Index (CPI) increased by 1.9% compared to last year. This is slightly lower than the 2.0% forecast. From the previous month, the CPI dropped by 0.1%, while a 0.1% increase was expected. Last month, it had already risen by 0.3%. The Bank of Canada’s core CPI rose by 2.6% year-over-year, just missing the 2.7% estimate. Month-over-month, the core CPI remained unchanged at 0.0%, falling short of the predicted 0.1% increase. The trimmed CPI stayed at 3.0%, exactly as expected, and the median CPI held steady at 3.1%. The common CPI decreased to 2.5%, compared to the 2.6% forecast.

Signals For Rate Cuts

These figures suggest the Bank of Canada may lower interest rates at its next meeting, with an expected cut of 25 basis points. A major factor is the 12.7% drop in gasoline prices over the past year. Without gasoline, prices rose by 2.4%, which is close to the Bank’s goal. The CPI was also influenced by steady prices in the cell phone market, where service prices increased by 1.5% after discount periods. Travel costs decreased, with travel tour prices dropping by 9.3% and air transport costs down by 7.6% in August. This weak inflation report signals the Bank of Canada may proceed with a rate cut soon. Traders in derivatives are likely to bet on lower interest rates by buying three-month CORRA futures, predicting a more cautious approach. This follows the trend that began when the Bank made its first rate cuts in summer 2024.

Market Reactions And Expectations

Expectations for lower interest rates can put pressure on the Canadian dollar, leading traders to sell the loonie against the U.S. dollar. This may raise the USD/CAD exchange rate. Historically, lower-than-expected inflation data often leads to a weaker Canadian dollar. Currently, markets have only priced in one more quarter-point cut, which may be too little considering this data. There seems to be a chance to benefit from options markets for a quicker pace of easing by the year’s end. The economy has slowed since late 2024, with GDP growth stalling around 1%. This gives the Bank plenty of reasons to act decisively. This report fits into the larger economic trend of gradual cooling we’ve seen over the past year. Canada’s unemployment rate has slowly risen to 6.4% in the latest labour force survey, up from an average of 6.1% throughout much of 2024. A less robust job market allows the Bank of Canada to feel more comfortable cutting rates without worrying about a wage-price spiral. However, it’s important to note that the significant 12.7% drop in gasoline prices plays a crucial role in this picture. Excluding this volatile factor, inflation stands at 2.4%, much closer to the Bank’s target. If global oil prices suddenly rise, it could quickly alter the inflation outlook and challenge the current expectations for lower rates. Create your live VT Markets account and start trading now.

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