MNI: Canada CPI Quickens More Than Expected, Outside BOC Band

Canada’s inflation rate quickened more than expected in July to 3.3%, taking it back outside the central bank’s target band, led by a "base effect" where gasoline prices declined by less than a year earlier.

The Consumer Price Index rose faster than the 3% economists anticipated and was up from June's 2.8% pace, Statistics Canada said Tuesday from Ottawa. Prices on a monthly basis also advanced 0.6% to double the 0.3% consensus and core indexes failed to trend down as many economists predicted. The "median" core measure remained at 3.7% for a third month and the "trim" index moved down just a notch to 3.6%. 

While BOC Governor Tiff Macklem had warned inflation could tick up after slowing for most of the last year, this is the last report before the Sept. 6 interest-rate decision where most economists predict a hold at 5%, the highest since 2001. The price uptick echoes the last inflation report before Macklem ended a pause to resume hiking in June, though officials expect inflation to hover around 3% in the near term.

Gasoline exerted less downward pressure on the inflation rate, falling 13% versus 22% in June. Even excluding gasoline inflation nudged up to 4.1% from 4%. Significant price increases include a record 31% rise in mortgage costs, a 5.5% rise in rents, a 12% jump in electricity rates and a 7.7% rise in the cost of meat. High profile grocery prices "remained elevated," StatsCan said, rising 8.5% in July after a 9.1% increase in June.

The Bank sets interest rates to keep inflation in the middle of a 1% to 3% band and predicts a return to the 2% target in mid-2025.

Even if the Bank of Canada holds rates next month the prospect of sticky inflation means they could just keep rates high for longer. Most economists already see officials holding rates into the middle part of next year. Other indicators signal a slowing economy, such as rising unemployment and a separate report today showing factory sales fell 1.7% in June. Slower growth in the U.S. and China may also give the Bank reason to hold out for more evidence before hiking again. 

The Bank of Canada hiked rates eight straight times as inflation reached 8.1% last year before pausing early this year and returning to hike in June and July as the economy kept moving ahead. Officials have said the effect of its past moves, including the shock 100bp hike last July, may just be slow in coming.

Officials have also said allowing embedded inflation will only mean much tougher monetary policy down the road. Macklem says that while he doesn’t want to overdo hikes several things could frustrate efforts to get prices in line, including higher wage demands, stubborn services prices or shifting inflation expectations. Price gains have already topped 2% since March of 2021.

Two-thirds of firms see inflation running more than 3% for the next two years according to the Bank’s latest quarterly survey. Households saw inflation at 5.1% a year from now and 3.9% in two years.

Inflation may also soon reflect more supply-chain challenges including flooding in Nova Scotia, wildfires that shut down some Alberta energy production and a strike at the nation’s biggest port in Vancouver.