Canadian Inflation Holds at 3% in August  

• Headline CPI inflation held at 3.0% year-on-year (y/y) in August, in line with market expectations.
• Prices at the pump provided some downward force on headline inflation as CPI ex-gasoline rose 2.4% y/y in August, up from 2.2% in July. Gasoline prices were up 22.8% y/y in August, compared with 25.7% in July. Statistics Canada cited that this downward pressure was offset by higher prices for travel tours (+26.1% y/y in August, up from 15.2% y/y in July) and rents. For travel tours, this was largely due to unfavourable comparisons to a year ago, with travel prices down 2.9% month/month in August.
• Price pressures at grocery stores cooled below headline inflation for the first time in almost two years. Prices for food purchased from stores were up 2.8% in August, from 3.1% in July.
• Other downward pressure on inflation came from clothing, with prices down 1.1% y/y in August compared to a 0.9% y/y increase in July.
• Shelter inflation ticked up slightly in August to 1.5% y/y from 1.3% y/y in July. Statistics Canada cited an increase in rents, which are up 2.8% y/y in August, up slightly from 2.5% y/y in July.
• The Bank of Canada’s preferred core inflation metrics (median and trim) averaged 2.0% in August, unchanged from 2.0% in July.  Zeroing in on August, core price pressures picked up to 2.7% annualized.

Key Implications

• Inflation held at the top of the Bank of Canada’s 1-3% control range in August. But also, as expected, the Bank of Canada’s (BoC) core inflation measures started to drift a bit above 2% in August as higher energy costs start to drive price increases in other areas of the economy.
• Prior to today’s inflation reading, the 2-Year Government of Canada bond yield had risen over 40 basis points over the past month as markets moved to price in interest rate hikes from the Bank of Canada this year. We don’t think today’s inflation report supports this degree of tightening. Yes, core inflation is likely to move up in the coming months, but off a very low level, and is expected to remain with the BoC’s comfort zone. That is driven by our expectations for modest growth in Canada, as the economy continues to be weighed down by the uncertainty and tariffs on our exports to the U.S.