Highlights:

  • The year-over-year rate of headline CPI inflation rose to 1.4% from 1.2% in July – largely because of an increase in energy prices.
  • 2 of 3 of the Bank of Canada’s preferred ‘core’ measures ticked higher
  • Year-over-year price growth excluding food & energy prices held steady at 1.5%.

Our Take:

There were further tentative signs in August that the puzzling recent underperformance of Canadian inflation measures is gradually coming to an end. To be sure, most of a pop higher in the year-over-year headline inflation rate to 1.4% in August was the result of higher gasoline prices – and the rate itself is still well-below the Bank of Canada’s 2% inflation target. The year-over-year rate excluding food & energy products held steady at 1.5% after posting its first increase in six months in July but two of the Bank of Canada’s preferred ‘core’ inflation measures-the CPI-trim and CPI-common – ticked up slightly with the third – the CPI-median – holding steady at a stronger 1.7%. Perhaps more telling, the underperformance in those core measures on a year-over-year basis seems to have been concentrated earlier in this year. Our calculations suggest the month-over-month increases in the CPI-trim and CPI-median rates, for example, have both averaged over a 2% annualized rate over the last three months. That is the first time that has happened since June 2016.

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It remains difficult to argue that the underperformance of core measures of inflation over the last year in Canada is related to a lack of consumer demand given strong household spending and what look like relatively tight labour markets. That suggests other likely transitory, but frustratingly difficult-to-identify, factors have been at play. Today’s report provides tentative evidence this underperformance is easing, consistent with our view that price growth closer to the Bank of Canada’s 2% target will gradually reassert itself. We expect that will allow the Bank to continue to hike rates at a gradual pace to lean against strong economic growth, even if current inflation pressures aren’t yet forcing policymakers’ hands.

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