Quick take

Inflation soars to 18-year high

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  • The Consumer Price Index (CPI) in August soared to 4.1 per cent, the highest year-over-year growth in 18 years. This month’s figure was higher than the 3.7 per cent registered in July, as well as the consensus forecast of 3.9 per cent.
  • Gasoline prices continue to power inflation, although monthly growth slowed from 3.5 per cent in July to 0.4 per cent in August. Meanwhile, increasing input costs boosted the prices consumers pay at grocery stores for meat (+6.9 per cent) and dairy products (+4.2 per cent) boosted up the price consumers pay at both grocery stores and restaurants.
  • Excluding food and gasoline prices, inflation was up 3.0 per cent last month, higher than the 2.8 per cent increase in July.
  • The traveller accommodation price index rose 19.3 per cent, as demand picked up on the back of eased travel restrictions.
  • Shelter prices (+4.8 per cent), which make up just under a third of the CPI basket, remained elevated. Despite historically low mortgage interest costs, surging prices of new homes have increased homeowner’s replacement costs by 14.3 per cent. This is the largest yearly increase in almost 34 years.
  • Goods prices continued to grow strongly, up 5.8 per cent in August compared to 5.0 per cent in July. Services prices also ticked higher, increasing from 2.6 per cent in July to 2.7 per cent in August.
  • Seasonally adjusted CPI rose by 0.4 per cent, lower than the 0.6 per cent gain in July.
  • All three of the Bank of Canada’s core inflation measures moved higher in the month. CPI-trim was up 3.3 per cent from 3.1 per cent, CPI-median edged up to 2.6 per cent from 2.5 per cent, and CPI-common increased by 1.8 percent from 1.7 per cent. The average of the three measures now stands at 2.6 per cent compared to 2.5 per cent in July.

Key insights:

  • The latest inflation data reflect an economy where supply keeps falling short despite robust demand. Several factors, mostly temporary, are pushing up consumer prices. Still, uncertainty surrounding the pandemic means that the persistence and magnitude of these factors are unclear. What seems temporary today, such as supply chain disruptions, may transition into something more long-lasting.
  • Inflation is likely to remain elevated in the near term in large part due to supply chain disruptions caused by shortages of key manufacturing inputs and rising freight costs. Besides, the rebound in consumer demand, especially for in-person services, will keep inflation running above the Bank of Canada’s inflation target range of 1 to 3 per cent for the rest of this year.
  • The Bank of Canada may change tack if inflation and jobs data continue to surprise on the upside. A change in the Bank’s plans will affect when and how it will end its quantitative easing program and how soon it conducts the first rate hike.

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Anna Feng

Anna Feng

Economist

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