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.
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.
