Canada's Core Inflation Trend Isn't "Screaming Out" for Rate Cut, Says Scotiabank

12:12 PM EDT, 08/19/2025 (MT Newswires) -- Measures of core inflation were softer in July, but it's just one set of readings ahead of a lot of further information on the road to the next Bank of Canada decision on Sept. 17, said Scotiabank.

That's probably why the market reactions on Tuesday after the release of the consumer price index were fairly muted, noted the bank.

Canada's two-year Government of Canada bond (GoC) yield fell by about 5bps post-data, with some of that due to position covering after the yield was rising into the data, stated Scotiabank. USD/CAD moved up by just over a third of a cent, perhaps also influenced by stronger-than-expected United States housing starts. OIS markets added a couple of basis points to September cut pricing that now stands at about 9bps-10bps and so material but well shy of being priced.

Trimmed mean CPI and weighted median CPI both landed at about 2.25% month over month at a seasonally adjusted and annualized rate in July. Traditional core CPI was even lighter at 0.8% month-over-month seasonally adjusted annual rate SAAR. The yearly trimmed mean (3%) and weighted median (3.1%) measures aren't spot year-over-year calculations but get referenced by the BoC and remain at the top end of the inflation target range.

The key driver was cooler service price inflation, which largely ground to a halt in July, according to Scotiabank. Core goods inflation (excluding food and energy) also softened.

Based on the data as it stands now, those aren't light core inflation readings, and they're definitely not undershooting the BoC's 2% inflation target, but they are back in the confines of the BoC's 1%-3% target range for headline inflation while using core gauges as the more stable way of operationalizing achievement of this target range. That balances the risks to the rate outlook a little more than previously, added the bank.

The BoC couldn't base further easing from what is already a roughly neutral policy rate on such numbers, in Scotiabank's opinion. It would either need more evidence of downside risk to inflation tracking that may or may not arrive with further data, or high confidence in its ability to forecast price pressures, which doesn't seem to be in vogue at the BoC which continues to avoid a base case projection.

About 40% of the basket is rising by more than 3% year over year and about 30% of the basket is rising by over 4%. The breadth of price pressures remains "disconcerting."

The leisure category -- "recreation, reading and education" --fell 0.3% month-over-month SA with contributing factors such as travel tours and traveler accommodation. It's unclear whether that's temporary or not, but wildfires across much of the country may have inhibited travel and tourism.

Shelter cost inflation moved up, including through rent, but house prices as captured in CPI exerted some downward pressure. Transportation prices were soft, including both gasoline prices and vehicle prices.

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