Highlights:
- CPI dipped 0.1% in August in line with expectations
- The year-over-year rate slid to 2.8% from 3.0% in July
- Bank of Canada’s core measures averaged 2.1% in August, after holding around 2.0% over the prior six months
Our Take:
Canada’s inflation rate dipped in August from July’s 3% but remained elevated at 2.8%. Relative to July, prices slid 0.1% meeting market expectations. The decline reflected the partial reversal of the sizeable increase in travel tours and air fares reported in July and modest decline in gasoline prices. Even with the decline relative to a month earlier, upward pressure on the annual inflation rate came from the 19.9% jump in gasoline prices and 26.4% rise in airfares followed by a 5.8% increase in mortgage interest costs.
More important for the outlook for monetary policy is that the bank’s underlying measures of inflation ticked up to average 2.1% after holding around the bank’s 2.0% target for six months running. Given the tightness in the labour market and capacity strains reported by companies, risks favour upward pressure on prices being in the pipeline. At present these inflation risks aren’t likely to keep policymakers awake at night and aren’t sufficient for them to deviate from their gradual tightening approach. With the bank taking a pass at the September meeting and both the economy and core inflation aligning with their forecasts, we look for a 25bps rate hike to be announced in October.
