Canada CPI Preview: Forecasts from five major banks, another jump in inflation

Higher energy prices will push headline price growth higher. We expect a 3.7% YoY rate in August, up from 3.3% in July. The BoC’s preferred core measures may tick higher on a YoY basis due to soft year-ago ‘base effects’ (the month-over-month increase in those measures a year ago was relatively small). But it’ll be more focused on the recent three-month average growth rate for the ‘median’, ‘trim’, and trim services ex-shelter (sometimes called ‘super core’) measures. All of these are still ‘sticky’ at rates above the top end of the BoC’s inflation target. But we continue to expect signs of softening in the economy to spill over into softer price growth over the remainder of the year – preventing additional BoC interest rate hikes.

An increase in gasoline prices could have translated into a 0.2% increase in the CPI in August (before seasonal adjustment). If we’re right, the 12-month rate of inflation should come up from 3.3% to a 4-month high of 3.8%. Similarly to the headline print, the core measures preferred by the Bank of Canada should increase in the month, with CPI-med likely moving from 3.7% to 3.8% and CPI-trim from 3.6% to 3.7%.

We expect a solid 0.4% MoM increase in headline CPI in August, with base effects implying the YoY reading climbs to 4.1%. Part of the strength in August will be due to further increases in energy prices. A pick-up in mortgage costs with higher interest rates should help support shelter prices. However, the most substantial upside risks to CPI in August are likely to be due to various service prices. The most important elements of August inflation data will be the core inflation measures. The three-month run rate of core inflation has been stably in a 3.5-4% range for a year, implying that annual measures will also remain around this range in August. Higher three-month inflation would understandably increase the chance of further BoC rate hikes, possibly as soon as October.

The jump in oil prices that saw consumers paying more at the pump in August will be behind a likely 0.2% MoM NSA advance in the total CPI in that month. That would boost the annual rate of inflation to 3.8%, magnified by a weak year-ago reading falling out of the calculation. Higher gas prices will have left less money for spending elsewhere, and weaker demand could have prevailed in categories outside of food and energy, leaving 12-month ex. food and energy prices at 3.4%, and validating the Bank of Canada’s hold in September.

We look for headline CPI to rise by 0.2% MoM in August as inflation jumps 0.5pp to 3.8% from a combination of base effects and higher energy prices. Gasoline and other energy products will contribute ~0.2pp on the month or 0.1pp on a year-ago basis, with the latter improving from a 0.6pp drag in July. Setting aside the impact of higher energy prices, we expect the August report to show modest progress on the path to 2%. Seasonal headwinds should hold food prices to a minor increase, and we also look for another muted performance across core goods as households pare back discretionary spending. However, these improvements are unlikely to translate into softer core inflation pressures with CPI-trim/median expected to edge 0.05pp higher to 3.7% YoY (+0.1pp for CPI-trim). This would leave 3m rates of core inflation to persist in their recent (3.5-4.0%) range, although our forecast would see the ex. food/energy measure edge lower by 0.1pp to 3.3% YoY.