Inflation likely accelerated in August, economists anticipate, reversing progress

Economists expect inflation to accelerate again to around 4 percent last month, reversing earlier progress as gasoline prices pushed inflation higher.

Statistics Canada’s August report on the consumer price index, due to be released Tuesday, is expected to show the annual inflation rate rose for a second straight month.

Canada’s inflation rate fell to 2.8 percent in June, falling within the Bank of Canada’s 1 to 3 percent target range for the first time since March 2021. Celebrations surrounding the However, this benchmark was short-lived as inflation increased. next month.

Desjardins CEO and head of macro strategy Royce Mendes said he expects headline inflation to stand at 4 percent for the month of August, up from 3 .3 percent in July.

“We expect the CPI data to reveal that Canadians’ wallets have been hit by rising prices, again, largely because of gas prices,” Mendes said.

The price of oil has risen steadily throughout the summer, surpassing US$90 per barrel this week. By comparison, June prices hovered around US$70 per barrel.

Meanwhile, TD forecasts that inflation has increased to 3.8 percent. Executive Economic Director James Orlando said another factor likely contributing to rising inflation in August is the fact that inflation started falling a year ago.

“We saw a decline in inflation last year, which means there will be (annual) base effects that translate into higher inflation next week,” he said.

The Bank of Canada has left the door open to further rate hikes, in part because it believes it will take some time to bring inflation back to 2 percent. But economists say the recent slowdown in the economy will likely convince the central bank to stay away.

Earlier this month, the Bank of Canada opted to keep its key interest rate at 5 percent after raising rates at its two previous meetings. The move came after recently released data showed the economy contracted in the second quarter.

There are also other signs the Canadian economy is slowing: The job market is no longer as tight as it was a year ago, while job vacancies are falling and the population is growing.

Orlando said the slowing economy gives the Bank of Canada justification to keep interest rates where they are, even if inflation rises in the short term.

“All the things that worry you that could lead to higher domestic inflation in Canada…those are starting to show a very rapid slowdown in the Canadian economy,” Orlando said.

Although progress in reducing inflation appears to be stalling, economists and the Bank of Canada expect that the tightening economic conditions caused by rising interest rates will eventually lead to more price increases. weak.

“While we are not yet seeing compelling evidence that underlying inflationary pressures are heading toward the 2% target, where they have been stuck for some time, I believe this is only a It’s a matter of time before these interest rate hikes bear fruit. through this system, to curb economic activity enough to bring inflation down to 2 percent,” Mendes said.

In the meantime, however, the Bank of Canada will have to make sense of rising inflation for Canadians.

Following Tuesday’s inflation release, Bank of Canada Deputy Governor Sharon Kozicki is expected to deliver a speech at the University of Regina.

Orlando and Mendes said it would be up to the central bank to explain why the year-over-year inflation figure is not the only indicator it cares about.

Other numbers, such as fundamental measures of inflation that strip out price volatility, are particularly important to the central bank.

“The number that everyone will see will be 4 percent, or something like that,” Mendes said.

“But the Bank of Canada needs to be very clear about the usefulness of core inflation as an indicator of future inflation, or the usefulness of looking at other parts of the economy.”