The country showed signs of growing price pressures last month with inflation staying strong and its underlying pace grinding higher — both of which propped up expectations that higher interest rates are on the way.
The annual inflation rate for August receded somewhat to 2.8%, easing from July’s 3% pace that marked Canada’s highest reading in seven years. Last month’s step back was largely due to more-moderate expansion in gasoline prices, Statistics Canada said Friday as it released its latest consumer price index.
The resilience of the August headline number kept it above the mid-point — and close to the top end — of the Bank of Canada’s target range of 1% to 3%. The inflation-targeting central bank uses interest-rate hikes as a tool to help prevent price growth from rising too high.
Ahead of its rate decisions, the Bank of Canada also keeps close watch on the three measures of underlying inflation, which strip out more-volatile items like gas prices.
Statistics Canada’s figures show that each measure crept upwards once again in August, with the average of the three moving up to 2.1%, compared with 2% in July and 1.96 in June.
Bank of Montreal chief economist Douglas Porter said that, combined, the core measures are matching some of the highest underlying inflation readings Canada has seen since 2009. Porter believes the inflation figures are “a touch uncomfortably high for the Bank of Canada.”
With a tightened labour market and robust growth, bank governor Stephen Poloz is widely expected to raise the benchmark interest rate at the Oct. 24 rate announcement.
“I think that this just really is another feather in the cap and turns up the odds by a notch or two,” Porter said of Friday’s inflation report.
“Nothing to get overly concerned about, but I think the big story is inflation has moved away from years of relatively low readings to a little bit above what the Bank of Canada targets.”
However, clouding the interest-rate picture is a significant wild card: the fate of the North American Free Trade Agreement.
Without more clarity on the deal’s renegotiation, Porter said it’s tough to know precisely what Poloz will do.
The Bank of Canada, which has stressed it will stick to a gradual rate-hiking approach, has made a point of saying it’s closely watching the NAFTA talks and other trade policy developments, which could have negative impacts on the economy.
After the release of Friday’s inflation report, other analysts said Poloz is in line to raise the rate next month.
“While the headline inflation has eased off somewhat, the Bank of Canada core measures continued to move forward,” Toronto-Dominion Bank economist Ksenia Bushmeneva wrote in a research note.
“Continued progress on the inflation front alongside a well-performing economy and a range of indicators pointing to limited excess capacity suggest that maintaining stable inflation will require further rate hikes by the central bank, with another one likely coming next month.”
Following last month’s policy meeting, the Bank of Canada described the recent rise in headline inflation as temporary. It predicted inflation to fall back towards 2% in early 2019 once the effects of past increases in gas prices fade away.
The Statistics Canada report Friday showed year-over-year pump prices rose 19.9% in August, compared with a 25.4% increase in July. Excluding gas prices, the inflation rate was 2.2% last month.
A closer look at August’s inflation numbers shows prices of passenger vehicles rose 2.3%, up from 2% in July. Statistics Canada said this was mostly due to increased availability of following-year models compared with a year ago.
The prices of booze and tobacco were up 4.6% last month, while food costs increased 1.6%.
In a separate report Friday, Statistics Canada said retail trade expanded 0.3% in July in large part because of sales boosts at food and beverage stores and gas stations.
The July increase, which brought sales to $50.9 billion, followed a June contraction of 0.1% and a May expansion of 2.2%.