Gasoline Reignites Year-over-Year Price Growth in August

Canadian Economics

  • In August, the Consumer Price Index (CPI) rose by 4.0 per cent (y/y). This was higher than July’s 3.3 per cent (y/y) increase.
  • Gasoline prices rose by 4.6 per cent (m/m) and were 0.8 per cent higher than a year ago. Year-over-year, food prices increased in stores (+6.9 per cent) and restaurants (+6.1 per cent).
  • Core CPI (excluding food and energy) grew by 3.6 per cent in August (y/y), higher than the 3.4 per cent increase (y/y) in July. Higher prices in several shelter and food subcategories were key to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI grew by 0.6 per cent in August (compared to an 0.6 per cent increase in July).
  • The average of the Bank of Canada’s three core inflation measures grew to 4.3 per cent in August from 4.1 per cent in July. CPI-common was flat at 4.8 per cent, CPI-median grew to 4.1 per cent, and CPI-trim increased to 3.9 per cent.

Key Insights

Over the last year, the gradual easing of gasoline prices has helped the pace of overall price growth fall back to earth. However, the price of gas has begun to pick up again. In August, gasoline was a net contributor to overall price growth and the same will likely be true in September. Food price growth, too, decelerated slightly in August but more inflationary pressure could be in store (and in restaurants) if atypical weather patterns and export controls, and the collapse of Ukraine’s grain export deal, continue to shock global food production. Unfortunately, the sight of prices going up at the pump and in the aisle will likely help to keep consumer inflation expectations higher for longer.

Headline inflation is bouncing up again, but—more worryingly—core inflation also ticked up in August. The Bank of Canada’s 2 per cent inflation target is a target for the headline inflation rate, but the behaviour of core inflation is typically of greater bearing in monetary policy decisions. And, in August, both CPI-trim and CPI-median picked up (and the changeable CPI-common held flat). However, this re-acceleration of core inflation comes at a time when the labour market and economic activity are cooling, which complicates the picture. Given the balance of risks to the inflation outlook, however, any enduring strength in core inflation could force the Bank’s hand to raise rates or push back future monetary policy loosening.

As the economic price that must be paid to quell inflation becomes apparent, it remains an exceptionally delicate time for monetary policy. Calls to raise the Bank of Canada’s inflation target, for example, could become louder if the economic pain spurred by higher interest rates becomes severe or prolonged. Conversely, elevated inflation could continue to wreak havoc on the economy if monetary policy isn’t tight enough to rein it in. The balancing act between over-tightening and under-tightening—and the associated risks of each to the health of the Canadian economy—is playing out in real time. All the while, already-elevated inflation puts consumers in a vulnerable spot should another domestic or global shock jostle prices higher again.

For more details about our inflation forecast and inflation’s impact on the Canadian economy, please consult our Canadian Three-Year Outlook.