Canada: Headline Inflation Eases in August, but Core Measures Accelerate

Fundamental analysis of Forex market

Consumer prices rose 2.8% year-on-year in Canada in August, a slight deceleration from the 3% posted in July but right in line with market expectations. Adjusted for seasonal patterns, prices rose 0.1% month-on-month following a large 0.5% increase in July.

Some of the key categories that boosted inflation in July have eased off in August. Air transportation prices declined, following a 16.4% jump in a prior month. Ditto for gasoline prices, with price growth slowing from 25.4% to 19.9% on a year-over-year basis. As a result, the transportation index advanced by 7.2% y/y, down from 8.2% in July, but remained the fastest growing category.

Looking at broader categories, prices for durable goods rose 1.1% year over year, following a 0.8% increase in July. Meanwhile price growth for non-durable goods (+3.8% down from +4.4%) and services (+3.1% down from +3.2%) remained robust despite a light monthly deceleration.

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All of the Bank of Canada’s core measures edged higher on the month. CPI-common, CPI-median, and CPI-trim edged up by 0.1pp to 2.0%, 2.1% and 2.2%, respectively.

Key Implications

As expected, following a large jump in July, headline inflation cooled off in August. July’s surge was largely a result of one-off factors, such as a large increase in air transportation prices as airlines responded to higher fuel and labor costs. Pressure from gasoline prices has also eased this month, with prices at the pump declining. Excluding the often volatile food and energy components, inflation remained unchanged in August at 2.3% y/y.

While the headline inflation has eased off somewhat, the Bank of Canada core measures continued to move forward. 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.