MNI POLICY: Rising Core Inflation Raises Odds Of Oct Hike

By Yali N'Diaye

     OTTAWA (MNI) - Canadian core inflation gauges rose in August, likely

keeping the Bank of Canada on track for an expected October rate hike.

     The CPI-trim measure, which excludes the most volatile price moves in any

given month, jumped 0.1 percentage point from July to 2.2%, the highest since

February 2012, Statistics Canada said Friday. CPI-common, another calculation of

underlying inflation followed by the Bank, also gained 0.1 percentage point, to

2.0%.

     While the headline inflation rate eased to 2.8% in August from 3.0% in

July, it remained above the central bank's 2.0% mid-range target. The BOC's

third-quarter inflation forecast of 2.5% looks likely to be exceeded.

     In its Sept. 5 policy statement, the Bank blamed the higher-than-expected

July headline reading on a rise in airfares, but signaled greater confidence in

increased interest rates ahead.

     --AIR FARES JUMP

     Friday's underlying inflation data will reinforce the chances of this

year's third 25-basis-point hike when it meets again Oct. 24.

     Air transportation was once more the largest upward contributor to headline

inflation in August, jumping 26.4%, while gas prices rose 19.9% year-over-year.

     BOC rate increases are also adding to inflation, with mortgage interest

costs consistently among the top five upward contributors to 12-month inflation

since May.

     Mortgage interest costs rose 5.8% in August, the fourth-largest

contributor, behind food purchased from restaurants, which likely continues to

feel the impact of an increase in minimum wages in Ontario in January.

     Against this backdrop, barring the collapse of renegotiations of the North

American Free Trade Agreement, Friday's data raised the bar for the BOC to stay

on hold next month.

--MNI Ottawa Bureau; +1 613 869-0916; email: yali.ndiaye@marketnews.com

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