August Gasoline Prices Propel Canada’s Inflation to 4.0%

Highlights

• Inflation reaches 4.0% in August, surpassing 3.8% predictions.
• Gasoline prices rebound, major driver of inflation surge.
• Bank of Canada hints at potential borrowing cost adjustments.

Canada’s Inflation Jumps in August

In August, Canada witnessed its annual inflation rate soar to 4.0%, up from 3.3% in July. This unexpected surge, largely attributed to a spike in gasoline prices, was higher than analysts’ prediction of 3.8%. On a monthly basis, the consumer price index experienced a rise of 0.4%, a slight overshoot from the anticipated 0.3%.

Gasoline’s Significant Role

Gasoline prices, which had witnessed a 12.9% decline in the 12-month period leading up to July, experienced a year-on-year hike of 0.8% in August. This substantial shift became the primary catalyst for the increased inflation rate, marking the highest since the 4.4% observed in April.

Underlying Inflation Measures Rise

Of the Bank of Canada’s three core measures for underlying inflation, two reported increases. The CPI-median witnessed an uptick, moving from 3.9% in July to 4.1% in August. Concurrently, CPI-trim also elevated from 3.6% to 3.9%. Additionally, shelter prices saw a growth of 6.0% in August, compared to 5.1% in July. This increase was influenced by escalating rents and a hike in interest rates.

Bank of Canada’s Outlook

Bank of Canada Governor Tiff Macklem, earlier in September, alluded to the role of rising oil prices and projected a short-term rise in headline inflation. Although the central bank maintained its key overnight interest rate at 5% on September 6th, it acknowledged the economy’s phase of diminished growth. However, the bank also hinted at the possibility of increasing borrowing costs if inflationary pressures continue.

Short-Term Forecast

Given the prevailing factors and the central bank’s stance, the immediate forecast leans bearish. Although there is potential growth in inflation, the Bank of Canada’s readiness to adjust borrowing costs serves as a balancing force.