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.
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.
Signals For Rate Cuts
These figures support the Bank of Canada’s 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.
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.
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.
Market Reactions And Expectations
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.
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.
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.
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.
