The Canadian economy is cooling but inflation accelerated as the base effect from gasoline faded. Statistics Canada (StatCan) data shows CPI accelerated in August, with core measures still running hot and shelter costs returning to breakneck growth. That puts the Bank of Canada (BoC) in a tricky situation at the upcoming rate announcement, as it risks pouring gas on the inflation fire that’s already burning too hot.
Canadian Headline Inflation Accelerates As The Drag From Gas Eases
Canadian headline inflation accelerated last month, though it remains relatively low. CPI accelerated to 1.9% y/y in August, from the 1.7% reported in July. Cheaper gasoline prices continue to suppress headline data, with CPI rising to 2.4% y/y when excluded.
The suppression of gasoline is expected to fade over the coming months. Gas prices climbed 1.4% in August, leaving prices 12.7% lower than last year vs the 16.1% drop reported in July. As the base effect suppression fades, headline inflation is likely to rise even without much acceleration in other segments.
Bank of Canada’s Core Inflation Measures Remain Critically High
Accelerating headline data is further complicated by lofty core inflation measures. The Bank of Canada’s (BoC) preferred measures provide a more stable picture by stripping out the most volatile movements. CPI-Common’s annual growth came in at 2.5% in August, significantly higher than the BoC’s 2% target. The other two core inflation measures are pushing the central bank’s 3% upper bound of tolerance, with CPI-Median at 3.1% and CPI-Trim at 3%.
The persistent and sticky core inflation readings suggest underlying price pressure remains elevated despite headline data appearing relatively tame.
Canadian Shelter Costs Still Soaring, BoC Cuts Become Difficult
Source: StatCan.
StatCan specifically flagged one persistent issue—shelter. The largest component of the CPI basket is Shelter (+2.6%), but breaking it down both rent (+4.5% y/y) and mortgage interest (+4.2%) came in well above the BoC’s 2% target, even pushing above the 1—3% tolerance range.
Headline CPI may be near the BoC’s target, but cheap gas is having a hard time masking rising pressures. Core inflation is stuck at levels the BoC considers problematic, and with services and shelter still surging, rate cuts will be hard to justify at tomorrow’s meeting.
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