Falling inflation adds to Bank of Canada’s concerns

The fall in core inflation to a two-year low of 1.8% in August adds to the growing list of concerns for the Bank of Canada. The Canadian dollar’s sharp decline in 2014 and 2015 had kept core inflation slightly above the 2% mid-point of the Bank’s target range. But that upward pressure via surging import prices is now beginning to fade, with food price inflation slowing very sharply. As the domestic economy continues to misfire, core inflation will probably continue to edge lower over the next year or two. That is one of the reasons why we eventually expect the Bank to cut its policy rate again, albeit not until the first half of next year.