Courtesy of Canadian EconomicsSeptember 19, 2023
- In August, the Consumer Price Index (CPI) rose by 4.0 per cent (y/y). This was higher than July’s 3.3 per cent (y/y) increase.
- Gasoline prices rose by 4.6 per cent (m/m) and were 0.8 per cent higher than a year ago. Year-over-year, food prices increased in stores (+6.9 per cent) and restaurants (+6.1 per cent).
- Core CPI (excluding food and energy) grew by 3.6 per cent in August (y/y), higher than the 3.4 per cent increase (y/y) in July. Higher prices in several shelter and food subcategories were key to overall CPI growth.
- On a seasonally adjusted monthly basis, the CPI grew by 0.6 per cent in August (compared to an 0.6 per cent increase in July).
- The average of the Bank of Canada’s three core inflation measures grew to 4.3 per cent in August from 4.1 per cent in July. CPI-common was flat at 4.8 per cent, CPI-median grew to 4.1 per cent, and CPI-trim increased to 3.9 per cent.
Over the last year, the gradual easing of gasoline prices has helped the pace of overall price growth fall back to earth. However, the price of gas has begun to pick up again. In August, gasoline was a net contributor to overall price growth and the same will likely be true in September. Food price growth, too, decelerated slightly in August but more inflationary pressure could be in store (and in restaurants) if atypical weather patterns and export controls, and the collapse of Ukraine’s grain export deal, continue to shock global food production. Unfortunately, the sight of prices going up at the pump and in the aisle will likely help to keep consumer inflation expectations higher for longer.
Headline inflation is bouncing up again, but—more worryingly—core inflation also ticked up in August. The Bank of Canada’s 2 per cent inflation target is a target for the headline inflation rate, but the behaviour of core inflation is typically of greater bearing in monetary policy decisions. And, in August, both CPI-trim and CPI-median picked up (and the changeable CPI-common held flat). However, this re-acceleration of core inflation comes at a time when the labour market and economic activity are cooling, which complicates the picture. Given the balance of risks to the inflation outlook, however, any enduring strength in core inflation could force the Bank’s hand to raise rates or push back future monetary policy loosening.
As the economic price that must be paid to quell inflation becomes apparent, it remains an exceptionally delicate time for monetary policy. Calls to raise the Bank of Canada’s inflation target, for example, could become louder if the economic pain spurred by higher interest rates becomes severe or prolonged. Conversely, elevated inflation could continue to wreak havoc on the economy if monetary policy isn’t tight enough to rein it in. The balancing act between over-tightening and under-tightening—and the associated risks of each to the health of the Canadian economy—is playing out in real time. All the while, already-elevated inflation puts consumers in a vulnerable spot should another domestic or global shock jostle prices higher again.
2) Canada’s Inflation Rate Jumps To 4% Making The BOC’s Next Rate Decision Harder
Courtesy of Barrie360.com and Canadian PressPublished: Sep 19th, 2023
By Nojoud Al Mallees in Ottawa
Canada’s inflation rate has been rising for two consecutive months as underlying price pressures remain stubbornly high, a combination that makes the Bank of Canada’s next interest rate decision more challenging.
Statistics Canada released its latest inflation reading on Tuesday, which shows the annual rate rose to four per cent in August, up from 3.3 per cent in July.
Forecasters were widely anticipating inflation to come in hotter last month due to higher gasoline prices. But Tuesday’s report was even more discouraging than many expected.
“What is the most concerning is that (inflation) accelerated more than (expected) and that we also saw some core measures of inflation that the Bank of Canada track, accelerate as well,” said Andrew Grantham, CIBC’s executive director of economics.
Core measures of inflation strip out volatility in prices and play a significant role in how the Bank of Canada judges inflationary pressures.
With this latest uptick in price growth, Grantham said inflation during the third quarter is now on track to come in higher than the Bank of Canada forecasted in July.
Bank of Canada deputy governor Sharon Kozicki reacted to the latest inflation numbers in a speech at the University of Regina on Tuesday. She said swings in the inflation rate are to be expected.
“One of the big drivers in inflation this month was coming from energy and gasoline costs,” Kozicki said during a question-and-answer period after her speech.
“That’s one of those pieces that can be pretty volatile.”
Instead of focusing too heavily on swings in the headline rate that can be driven by categories with erratic prices, Kozicki said the central bank is keeping an eye on core measures. Those numbers, however, haven’t made much progress recently, she noted.
The central bank is slated to make its next interest rate decision on Oct. 25 — a decision economists say just got tougher.
“This is a very difficult decision,” said Grantham.
Earlier this month, the Bank of Canada decided to hold its key interest rate steady at five per centearlier this month as the economy slows.
Recent data showed the economy shrank in the second quarter while the unemployment rate has trended higher.
Statistics Canada released its latest job vacancies report Tuesday as well, which shows vacancies continue to fall.
Now, the central bank will have to weigh that data against higher inflation figures and decide which matters more.
“Our view at the moment is that they’re going to place weight on the weakening of the economy,” Grantham said, though he noted the next rate decision will be a “close call.”
Other Bay Street economists shared similar takes on Tuesday.
“We expect further signs of slowing will help the Bank to continue to stand on the sidelines, as outlined in our recent forecast. However, today’s inflation report has raised the odds they may need to make another move,” said TD managing director and senior economist Leslie Preston in a client note.
The Bank of Canada will have more data to consider before its next rate decision, including an inflation reading for September. But Grantham said that figure likely won’t be much different from August, given the recent rise in oil prices.
A slight silver lining to Tuesday’s report is that grocery prices are rising more slowly, with prices up 6.9 per cent from a year ago compared with a reading of 8.5 per cent last month.
Meanwhile, grocery prices fell by 0.4 per cent between July and August.
“I do think that the rate of inflation for groceries will continue to decelerate,” Grantham said.
“(But) if you’re the average Canadian, average household, you don’t want prices to just stop rising, you want them to kind of come down a little bit from these very high levels. I’m not sure that’s going to happen any time soon, unfortunately.”
Higher grocery prices have been a major pain point for Canadian families, particularly those with lower incomes who spend a larger share of their earnings on food.
Industry Minister François-Philippe Champagne met with top executives of Canada’s major grocery chains on Monday to discuss measures to stabilize prices.
After the meeting, Champagne said the grocers agreed to work with the federal government, but few details were provided on how prices could be stabilized.