The Consumer Price Index came in stronger-than-expected, up 0.4% in August, pushing the headline rate up to 2.6% from 2.1% in July. The jump in inflation has economists looking at possible hikes to interest rates.

The Bank of Canada’s core CPI measure, which excludes the eight most volatile items and indirect taxes, also rose much more than expected, by 0.5% in the month, lifting the year-to-year rate to 2.5% from 2.1%. This is the highest core rate since September 1995.

The sharp monthly increases in both the overall and core indexes were narrowly based, observes Bank of Montreal. Electricity costs jumped 6.8% and auto insurance premiums rose 2.6% in the month, accounting for more than half of the monthly increase in the overall and core measures. The timing of measurement periods is also boosting the numbers.

BMO says that the unexpected jump in core inflation in August will put extra pressure on the Bank of Canada to resume raising interest rates as early as the October 16 policy announcement date. “Barring further weakness in the U.S. data or equity markets, or an escalation of geopolitical tensions, we anticipate an increase in the overnight target rate of 25 basis points.”

“Governor Dodge warned this week that inflation was headed for the top of the target range due to insurance costs and very favourable results late last year. Still, this report is even frothier than expected, and will keep the Bank’s tightening bias firmly in place,” says BMO Nesbitt Burns, without predicting the Bank’s next move.

TD Bank is similarly coy, saying only that, “the case of a further 25-basis-point increase at its next fixed policy date on October 16th is building”.

“The Bank of Canada understands the arithmetic that will drive a near-term spike in the 12-month rate, but today’s much stronger-than-expected report nonetheless makes it more difficult to back away from a hawkish policy stance,” concludes CIBC World Markets.

“With its economy growing well above trend, Canada’s output gap has closed and excess demand will likely continue to produce pricing pressures in the ensuing months. Indeed, with core inflation at 2.5% on a year-over-year pace, it is now well into the upper end of the Bank of Canada’s 1-3% target band,” observes RBC Financial Group. “As such, this not only justifies the previous rate increases that the Bank of Canada has already engineered but also makes further rate increases much more likely with short term rates forced to rise to a more neutral setting.”

RBC also notes that wholesale sales in Canada increased by 0.7% in July, slightly higher than the expected 0.5% gain. “Most of the sectors saw increases in July, with the computer and software sector and the automotive sector producing notable gains in terms of value. This report is yet another indication that domestic demand remains very healthy in Canada. Growth of wholesale inventories in July coupled with the recent increase in manufacturing stocks invariably point to the fact that inventories will again contribute to economic growth in the third quarter.”