The all-items consumer price index for August ticked up to 1.4% on a year-on-year basis in August (July:1.2% y/y). On a month-on-month, seasonally adjusted basis, prices rose 0.1%, the first increase since this past May.  

Goods prices rose 0.4% y/y, largely driven by an uptick in energy and food prices. The average price of services rose 2.2% y/y.

Two of the Bank of Canada’s measures of underlying inflation rose in August. Both CPI-trim and CPI-common rose by a tenth of a percentage point to 1.4% and 1.5% respectively, while CPI-median held at 1.7% on a year-on-year basis.

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Key Implications

Today’s inflation data remains broadly consistent with our outlook for consumer price growth in the third quarter. The uptick in goods prices is likely to be more pronounced in September due to the spike in gasoline prices in the aftermath of hurricane Harvey, and there may be some upward pressure on fresh foods and vegetables later this year related to the damage that hurricane Irma has wrought upon Florida’s agricultural industry. However, the strong advance in the Canadian dollar should begin to exert downward pressure on goods prices in the months ahead.

An uptick in underlying inflation is somewhat encouraging and suggests that inflation may have stabilized in the last couple of months. Overall, this report will do little to change how the Bank of Canada is seeing the Canadian economy as evolving in the medium term. Underlying inflation pressures have risen a touch, consistent with the need to remove some monetary accommodation and may justify the two 25 basis point interest rate increases in the span of six weeks. Although the loonie is expected to exert a drag on goods prices in the months ahead, the Bank of Canada should continue to see through these tempoary factors as yet another quarter of robust economic activity is likely in 17Q3, eliminating even more slack and suggesting the need for tighter monetary policy.

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