Canadian inflation expected to cool with falling gas prices. But will it last?

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When can we expect to see a drop in our inflation rate?
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Falling gas prices are expected to drive down the annual rate of inflation in Canada for July, some economists say.

The average price for regular gasoline in Canada, which was 165.7 cents per litre on Monday according to CAA, has been dropping from the historic highs of $2 a litre seen earlier this year.

High gas prices played a key role in the country’s 8.1 per cent annual inflation rate last month, and now their decline will factor into Statistics Canada’s next Consumer Price Index (CPI) release on Tuesday, said Benjamin Reitzes, managing director of Canadian rates and macro strategist at BMO.

“They’ve been a big driver of prices on the way up and as they are starting to come down, they’re going to play a significant role here as well,” he told Global News.

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“They were down about 10 per cent or so in July, and they look poised to fall further in August so we should get another dampening impact on CPI next month as well.”

What’s going on with gas prices?

Global News graphic

The average price for regular gas in Canada was 207.2 cents per litre in June, data from Statistics Canada shows. The record-high price came after several months of rising costs at the pumps as Russia’s Ukraine war, combined with high demand and low supply for fuel, drove prices up.

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Last month, the average price for regular gas was 184.5 cents a litre, according to CAA. That drop is expected to play a role in July’s annual rate of inflation, which Reitzes predicts to come in at 7.6 per cent. Prices are expected to be only up 0.1 per cent in the month compared with June, he added.

“Slowing pace of inflation is really the bottom line here, and that’s going to be largely driven by lower gasoline prices,” Reitzes said.

Tu Nguyen, an economist with RSM Canada, expects the annual inflation rate for July to sit anywhere between 7.6 to 7.8 per cent, with the month-over-month price change to either be stagnant or move 0.1 per cent in either direction.

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It doesn’t matter if you drive or not — everyone is impacted by the price of gasoline, Nguyen added.

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“Most of us have a vehicle or even if we use a ride-sharing app — Uber and Lyft prices are affected by gasoline — it is something that influences household consumers and businesses every single day,” she said.

“When a change in gas prices occurs, we just feel that almost immediately.”

High inflation has led the Bank of Canada and other central banks to raise interest rates this year in an effort to bring it under control. However, concern has increased in recent weeks about the direction of the global economy. When it comes to energy demand, a recession, or even slower growth, impacts oil prices, which ultimately impacts the price at the pumps.

Is the same thing happening in the U.S.?

Falling gas prices are also impacting inflation south of the border. In the United States last week, consumer prices jumped 8.5 per cent in July compared with a year earlier, down from a 9.1 per cent year-over-year jump in June.

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On Aug. 11, gas prices dipped under US$4 a gallon for the first time in five months.

While that average has fluctuated since, it’s unusual for gas prices to fall during the summer as it’s peak driving season. Some U.S. states have suspended their gas taxes, shaving more off the final price at the pump, at least temporarily. Ontario, Alberta, and Newfoundland have done the same.

Even with prices coming down, OPEC last week lowered its forecast of global oil demand for the rest of this year and next year, basing those expectations on a belief that economic growth in the U.S., China and other key countries will be slower than it previously forecast.

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Most analysts don’t think prices will spike in the short term unless something unexpected happens, like a big storm that shuts down oil production in the Gulf of Mexico or floods refineries along the Gulf Coast, which has happened before.

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Patrick De Haan, head of petroleum analysis at GasBuddy, told The Associated Press last week that absent something like a hurricane, gas prices should drop another 10 cents to 25 cents a gallon over the next couple of weeks.

Tom Kloza, an analyst for the Oil Price Information Service, told AP that lower nationwide average gas prices “may stumble soon.” Besides the hurricane threat, Kloza said refineries, which have been running nearly full steam, will have to slow down because they have delayed maintenance work “that can’t be delayed indefinitely.”

Have we reached peak inflation?

If commodity prices continue to trend lower, then June was likely the peak for headline inflation in Canada, Reitzes said.

Of course, there are other factors when it comes to inflation, such as food prices that have been stubbornly high in Canada, but a swing in gas prices will impact the rate.

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“It is very much going to depend on those commodity prices, but it does look as though we’ve probably bottomed if commodity prices don’t come back up,” he said.

“The question now is, while inflation is expected to decline, how far down is it going to go and how quickly is it going to get there? How sticky is inflation going to be at the end of the day? And that’s something where we’re probably not going to find out until we get into next year.”

Nguyen thinks it’s a bit “premature” to declare peak inflation as there are many issues playing out in the world that could impact prices.

“If no other major event happens, we might be at this or heading to low inflation later on in the year,” she said.

“Having said that, with the pandemic going on (and) still a lot of political instability globally, if there is another shock to the supply chain, to global demand, that could send prices upward again.”

— with files from The Associated Press

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