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Canada’s annual inflation rate fell for a second consecutive month in August, a sign the Bank of Canada’s campaign to restrain price growth through much higher borrowing rates is having its intended effect.

The Consumer Price Index (CPI) rose 7 per cent in August from a year earlier, Statistics Canada said Tuesday in a report. That was lower than financial analysts’ estimate of 7.3 per cent. Inflation has slowed from 7.6 per cent in July and 8.1 per cent in June, which was near a four-decade high.

Prices fell 0.3 per cent in August from July, which was more than analysts expected. Gasoline prices, which fell 9.6 per cent during the month, were the primary driver of lower inflation. But it was not only at the pumps where consumers found some relief.

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Shelter costs dropped on a monthly basis for the first time since January, 2021, helped by a modest decline in rents. Clothing and footwear prices also fell. In turn, the average of the Bank of Canada’s core measures of annual inflation – which strip out volatile aspects of CPI and give a better sense of underlying inflation trends – fell to 5.2 per cent in August from 5.4 per cent in July.

“Is this too good to be true? We’ve seen head fakes in the numbers before, with recent data on U.S. inflation a prime example,” Royce Mendes, head of macro strategy at Desjardins Securities, wrote to clients. “However, it could be true that easing supply chain pressures, falling commodity prices and a highly interest-rate sensitive economy are all conspiring to see price growth cool in Canada ahead of other jurisdictions,” such as the United States.

There were, however, some discouraging signs. Grocery prices rose 10.8 per cent on an annual basis, the quickest pace in more than 40 years. And the Bank of Canada was quick to point out that 7-per-cent inflation is too steep for comfort.

“While we’re headed in the right direction, that’s still too high,” Paul Beaudry, deputy governor at the Bank of Canada, said in a speech on Tuesday at the University of Waterloo.

“We will continue to take whatever actions are necessary to restore price stability for households and businesses and to maintain Canadians’ confidence that we can deliver on our mandate of bringing inflation back to 2 per cent.”

Two weeks ago, the Bank of Canada raised its policy rate by 75 basis points to 3.25 per cent, part of an aggressive hiking cycle that started in March, when rates were at a pandemic low of 0.25 per cent. (A basis point is 1/100th of a percentage point.) Despite a slower pace of inflation of late, analysts expect the central bank to hike again at its meeting in late October.

“We’re seeing good trends” on inflation, Royal Bank of Canada economist Claire Fan said in an interview. But “with core inflation still so high, for that to drop persistently and quickly enough to 2 per cent, central banks will have no choice but to hike more,” she added. Ms. Fan projects a policy rate of 4 per cent by the end of the year.

The U.S. Federal Reserve will announce its next interest-rate decision on Wednesday. Analysts expect the Fed to hike its target for the federal funds rate by 75 basis points, to a range of 3 per cent to 3.25 per cent.

Inflation is proving tough to tame in the U.S. The country reported last week that its annual inflation rate had ebbed to 8.3 per cent. But core inflation – excluding food and energy – accelerated on a monthly basis. That led to a stock market selloff on fears of a recession triggered by higher interest rates.

Canada’s inflation figures are likely to be moderated again by gasoline in September. As of Monday, the national average price of regular unleaded gas was 155.4 cents a litre, down 9.5 per cent from the daily average in August, according to data from Kalibrate Technologies.

What hasn’t improved is grocery prices. Over the past 12 months, meat prices have risen by 6.5 per cent, bakery products by 15.4 per cent, fresh fruit by 13.2 per cent and pasta products by 20.7 per cent. “The supply of food continued to be impacted by multiple factors, including extreme weather, higher input costs, Russia’s invasion of Ukraine, and supply chain disruptions,” Statscan said in Tuesday’s report.

Another persistent trouble is that wages are still lagging inflation. The average hourly wage rose 5.4 per cent in August from a year earlier, part of a lengthy erosion of Canadians’ purchasing power.

Statscan noted that price growth is slowing for durable goods, which had been a big area of consumer demand during the pandemic, as people directed their spending away from services. The prices of household appliances rose 9 per cent on an annual basis, down from 11.5 per cent in July, with Statscan citing “reduced consumer demand.”

Ms. Fan expects consumer spending to slow further as households cope with higher debt-servicing costs. “It’s going to really squeeze their incomes and start to have more of an impact,” she said.

On Monday, Statscan reported that prices of industrial products and raw materials fell in August for a third consecutive month, including energy and petroleum products, fertilizer and softwood lumber.

“It takes time for those to flow through the supply chain and production layers, in order to reach consumers as lower prices,” Ms. Fan said. “But we do anticipate that is what’s coming, at least for merchandise goods.”