Canada’s inflation data for August 2025 presents a Consumer Price Index (CPI) increase of 1.9% year-over-year, slightly below the 2.0% forecast. Month-over-month, the CPI fell by 0.1% while a 0.1% rise was predicted, following a 0.3% increase the previous month.<\/p>\n
The Bank of Canada core CPI rose 2.6% year-over-year, narrowly missing the 2.7% expectation. Month-over-month, core CPI was flat at 0.0%, underperforming the forecast of 0.1%. The trimmed CPI stayed at 3.0%, meeting predictions, and the median CPI was unchanged at 3.1%. Common CPI fell to 2.5% from the 2.6% expected.<\/p>\n
These figures support the Bank of Canada\u2019s potential decision to lower rates at its next meeting, with only an additional 25 basis points cut expected soon. A key influence has been a 12.7% year-over-year drop in gasoline prices. Excluding gasoline, prices increased by 2.4%, close to the Bank’s target.<\/p>\n
The CPI has also been affected by stabilising prices in the cell phone sector, with service prices increasing 1.5% month-over-month post-discount periods. Travel-related costs also fell, with travel tour prices dropping 9.3% and air transport costs down 7.6% in August.<\/p>\n
We see this soft inflation report as a clear signal for the Bank of Canada to proceed with a rate cut in the coming weeks. Derivative traders will likely increase bets on lower interest rates, buying instruments like three-month CORRA futures to price in a more dovish path. This confirms the trend we saw begin with the Bank’s first rate cuts back in the summer of 2024.<\/p>\n
Lower interest rate expectations should put downward pressure on the Canadian dollar. We expect traders to favour selling the loonie against the U.S. dollar, potentially pushing the USD\/CAD exchange rate higher. This market reaction would be consistent with historical patterns, where lower-than-expected inflation data has often preceded a period of Canadian dollar weakness.<\/p>\n
The market has only priced in about one more quarter-point cut, which seems too low given this data. This suggests an opportunity exists in options markets to position for a faster pace of easing than is currently anticipated by the end of the year. With the economy having slowed considerably since late 2024, when GDP growth stalled near 1%, the Bank has plenty of reason to act more decisively.<\/p>\n
This report fits into the broader economic picture of gradual cooling we have observed over the past year. Canada’s unemployment rate has slowly risen, reaching 6.4% in the most recent labour force survey, up from the 6.1% average we saw for much of 2024. A softer job market gives the Bank of Canada more confidence to cut rates without fearing a wage-price spiral.<\/p>\n
However, we must note that the steep 12.7% drop in gasoline prices is doing a lot of the work here. Excluding this volatile component, inflation is still running at 2.4%, which is much closer to the Bank’s target. Any sudden rebound in global oil prices could quickly change the inflation outlook and challenge the current dovish sentiment.<\/p>\n
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