MONTREAL — The consumer price index increased two per cent in August from a year earlier, Statistics Canada said Tuesday. That matches the Bank of Canada’s target for inflation and guarantees the central bank will cut interest rates again next month. 

Bull’s-eye: The Bank of Canada raises and lowers interest rates to keep year-over-year changes in the consumer price index between one to three per cent. It does that by aiming for the midpoint of that band: two per cent. Policymakers rarely manage a direct hit, so the latest numbers will help restore the central bank’s reputation—scarred when inflation surged to a peak of 8.1 per cent in June 2022. 

Ahead of schedule: Interest rate changes take time to ripple through the economy, therefore central bankers must attempt to anticipate where things are headed. In July, the Bank of Canada predicted inflation was headed back to target, but not until the end of 2025. Lower gasoline prices, an important but volatile component of the price basket, were responsible for much of the deceleration from July, when headline inflation was 2.5 per cent. 

Still, Statistics Canada said that if gasoline had been excluded from the index, the increase from a year earlier would have been 2.2 per cent. And if mortgage interest costs had been excluded from the calculation, inflation would have been a mere 1.2 per cent. Weaker economic growth has created deflationary currents that are pushing against upward pressures. Broadly speaking, the prices of many discretionary items have fallen below 2023 levels, signalling weak demand. 

The best example might be clothing and footwear, in which prices plunged 4.4 per cent, after dropping 2.7 per cent in July. Statistics Canada observed that the clothing category typically gains momentum in August as students head back to school. This year, prices dropped for the first time since 1971.

Behind the curve: Some inflationary fires are still burning. The shelter component—a blend of housing related costs such as rent, mortgage rates and housing prices—rose 5.3 per cent, down from 5.7 per cent in July, but still high. Services increased 4.3 per cent, while goods dropped 0.7 per cent. The Bank of Canada will like seeing inflation at target, but it might not be satisfied. 

Expect a vigorous debate about whether governor Tiff Macklem is being too cautious. Ahead of the last policy decision, there was lots of evidence that the economy was faltering. Yet Macklem opted for a conservative quarter-point cut, citing significant shelter inflation and an uncertain outlook. Economists at Desjardins and Citibank were among those predicting the latest inflation reading will force the central bank to cut a half point when it meets on Oct. 23. The possibility certainly will be on the table.