Canada's Inflation Jumps to 4% in August, Squeezing the Bank of Canada Toward Another Rate Hike

Statistics Canada reported on Tuesday that consumer prices in August were 4 per cent higher than a year earlier, up from 3.3 per cent in July. It was the second sharp acceleration in a row and the highest annual reading since April. Bay Street analysts had expected 3.8 per cent. The result came only weeks after the Bank of Canada paused its rate increases, and it raised the odds that the bank will move again before the year is out.

Gasoline did much of the work. Pump prices have climbed in recent months after oil-production cuts by Saudi Arabia and Russia. They were up 4.6 per cent from July and 0.8 per cent from August of last year. Gasoline had been pulling the annual rate down because it was being compared with the extreme prices that followed Russia's invasion of Ukraine in early 2022. Now it is adding to inflation instead.

Energy was not the whole story. Rent inflation reached 6.5 per cent, compared with 5.5 per cent in July. Statistics Canada noted that higher interest rates are keeping families out of the housing market, which pushes more households into renting and lifts demand. Some landlords may also be raising rents to cover their own larger mortgage payments. Mortgage interest costs were up 30.9 per cent from a year earlier, a touch higher than in July, and they remain the single biggest contributor to consumer price inflation.

The measures that worry the central bank most are the core ones, which strip out volatile price swings to show the underlying trend. The average of the bank's two preferred core gauges rose to 4 per cent from 3.75 per cent in July, twice the bank's 2-per-cent target. Deputy governor Sharon Kozicki said in a speech the same day that underlying inflation remains well above a level consistent with the target, and that the bank is prepared to raise rates further if inflation stays stubborn. She also described the balance the bank is trying to strike: doing too little now would likely mean doing more later, while tightening too much risks needlessly hurting the economy. She said there are signs that rate increases are working and that past increases will continue to weigh on activity.

The bank has raised its policy rate 10 times since March 2022, to 5 per cent, the highest since 2001. It held steady earlier this month after data suggested economic growth in Canada was stalling. Its next decision is on Oct. 25. According to Refinitiv data, interest-rate swap markets now put the chance of a quarter-point hike in October at about 40 per cent, double the roughly one-in-five odds before the release. Yields on two-year Government of Canada bonds jumped to 4.9 per cent, above the highs reached in July. Bank of Montreal chief economist Douglas Porter told clients that core inflation has suddenly heated up alongside gasoline, and he suspects the next CPI report will be no better, with oil rising and core inflation elevated.

Food was one of the few bright spots. Annual grocery inflation slowed to 6.9 per cent from 8.5 per cent in July, and grocery prices fell 0.4 per cent from the previous month. Fruit, cereal and chicken rose more slowly than in July, while frozen beef, coffee and tea, and sugar and confectionery rose faster. Food inflation is still far above most other components of the index.

Inflation has fallen a long way from the four-decade high of 8.1 per cent last June, but the August figures show prices still rising quickly across a wide range of goods and services. The issue has become politically hot in Ottawa, where opposition parties say the government is not doing enough. Last week Prime Minister Justin Trudeau announced affordability measures, including cutting the GST on rental-housing construction and strengthening the Competition Bureau. On Monday the government summoned grocery chain executives and threatened unspecified "tax measures" if they do not stabilize food prices. On Tuesday Innovation Minister François-Philippe Champagne said Ottawa intends to "go after" large food manufacturers too.

The prominence of mortgage costs has led some politicians to blame the Bank of Canada itself. Governor Tiff Macklem rejected that two weeks ago, saying mortgage costs might be lower had the bank not raised rates, but inflation across the economy would be a much bigger problem. The next CPI report arrives before the Oct. 25 decision, and it will weigh heavily on what the bank does.