Economists are predicting that inflation in Canada reaccelerated to around four percent last month, reversing the progress made in previous months as gasoline prices pushed inflation higher. The August consumer price index report from Statistics Canada, set to be released on Tuesday, is expected to show that the annual inflation rate rose for a second consecutive month.
In June, Canada’s inflation rate fell to 2.8 percent, entering the target range of one to three percent set by the Bank of Canada for the first time since March 2021. However, the celebration for reaching this benchmark was short-lived as inflation ticked up the following month.
Desjardins’ managing director and head of macro strategy, Royce Mendes, expects the headline inflation to come in at four percent for August, up from 3.3 percent in July. Mendes attributes this increase to higher gasoline prices, which have hit Canadians’ pocketbooks. The price of oil has been rising steadily throughout the summer, surpassing US$90 a barrel.
TD, on the other hand, anticipates that inflation rose to 3.8 percent. James Orlando, the executive director of economics at TD, believes that the decline in inflation from the previous year will contribute to a higher inflation reading for August.
Although the Bank of Canada has kept the possibility of more rate hikes open, economists believe that the recent economic slack will likely convince the central bank to remain on the sidelines. Earlier this month, the Bank of Canada decided to hold its key interest rate steady at five percent after two consecutive rate hikes. The decision was made in response to the contraction of the economy in the second quarter.
There are other signs of softening in the Canadian economy, such as a less tight labor market compared to a year ago and a decline in job vacancies. Orlando believes that the slowing of the economy provides justification for the Bank of Canada to maintain its current interest rates, even if inflation is temporarily increasing.
While progress in lowering inflation is showing signs of stalling, economists and the Bank of Canada expect that tighter economic conditions resulting from higher interest rates will eventually lead to smaller price increases. Mendes believes that it’s only a matter of time before these interest rate hikes work their way through the system and drag down economic activity enough to pull inflation back to two percent.
However, in the meantime, the Bank of Canada will have to explain the rising inflation to Canadians. Following the release of the inflation data on Tuesday, Bank of Canada Deputy Governor Sharon Kozicki is expected to deliver a speech at the University of Regina. Economists emphasize the importance of other figures, such as core measures of inflation that remove price volatility, to the central bank.
Overall, economists and the Bank of Canada believe that it is important to look beyond the year-over-year inflation number to assess the true state of inflation and its future trends in the Canadian economy.