Inflation in Canada spiked far more than forecast in August, raising the prospect of another interest rate increase by the Bank of Canada.
Even though inflation was expected to increase because of rising gas prices, higher rents and comparisons to the moderate levels of a year ago, the 4% year-over-year gain in the Consumer Price Index far exceeded the central bank’s 2% target. On a month-over-month basis, prices went up 0.4%, according to data released by Statistics Canada on Tuesday.
The increases were broad-based, with prices rising in all core inflation measures for the first time this year. Core inflation measures reveal underlying price pressures in the economy, and the numbers paint a picture of stubborn inflation.
For the Bank of Canada, another rate hike remains in the picture even as the central bank factors in evidence of a cooling economy, including a rising unemployment rate and falling job vacancies.
Although the increase in gasoline prices did not come as a surprise, high gasoline and energy prices have a ripple effect, causing prices of all other goods and services to increase. There is a risk that inflation will remain elevated into the fall, although businesses might no longer be able to pass on the costs to consumers the way they did a year or two ago.
Inflation was also fueled by the rise in housing costs, especially rentals. Rent prices climbed by 6.5% over the year amid Canada’s housing crisis, a classic problem of chronically inadequate supply and ever-growing demand.
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In addition, all data point to a critical lack of new housing being built to accommodate Canada’s growing population, which means housing costs will continue to accelerate in the short and medium term.
Grocery prices—a key concern for households—fell by 0.4% on a month-over-month basis from July to August, and were up by 6.9% on a year-over-year basis.
Another major contributor to August’s inflation was the base-year effect, or comparisons to a year ago, when prices were decreasing. Even if prices were to stay the same between July and August this year, the year-over-year inflation would be 3.6%. For inflation to stay constant at 3.3%, prices would have to decrease by 3% between July and August, which was improbable.
The takeaway
While the economy shows signs of cooling in the labor market, August’s inflation data serves as a reminder that the path to price stability is far from finished.
