Headline and Core Inflation Drop, but Remain Too High for Comfort

  • In August, the Consumer Price Index (CPI) rose by 7.0 per cent (y/y). This was lower than the 7.6 per cent increase (y/y) in July.
  • Gasoline prices fell by 9.6 per cent (m/m) but were 22.1 per cent higher than a year ago. Year-over-year, food prices increased in stores (+10.8 per cent) and restaurants (+7.4 per cent).
  • Excluding food and energy, the CPI was up by 5.3 per cent in August (y/y), which was less than the 5.5 per cent increase (y/y) in July. Rising prices in several shelter and transportation subcategories remained key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI rose by 0.1 per cent in August, the same as in July.
  • The average of the Bank of Canada’s three core inflation measures fell to 5.2 per cent in August from 5.4 per cent in July. CPI-median fell to 4.8 per cent, CPI-common moved down to 5.7 per cent, and CPI-trim fell to 5.2 per cent..

Key Insights

Down a little more, but still a long way to go. Year-over-year CPI growth cooled further in August, but the pace of this deceleration is likely cold comfort for Canadian households and businesses. Prices for services grew by 5.5 per cent (y/y) amid high demand for travel and tourism. Propelled by higher interest rates, mortgage interest costs also increased by 4.8 per cent (y/y). Although house prices are falling, higher interest costs and rising rents are keeping overall shelter prices high—making housing less affordable for the average Canadian. Fortunately, core inflation—a measure of underlying price pressures—fell in August, which bodes well for the inflation outlook.

Global price pressures, including supply chain bottlenecks and surging commodity prices, are tepidly subsiding. But this inflationary bout may be entering a new phase. While a full-blown wage-price spiral may not be in the cards, domestic wage growth in recent months—and in the months to come—may prolong the period in which inflation remains above the Bank of Canada’s upper target limit of 3 per cent. Businesses may not have fully anticipated nor factored in the wages negotiated in today’s drum-tight and agitated labour market. Persistently higher labour costs may eventually factor into higher consumer prices.

Taking the Bank of Canada at its word, another interest rate increase is coming. While inflation may have peaked, it is still too high for the Bank’s comfort. Our latest national forecast anticipates another 50-basis point increase in October. Slowing housing markets and lower spending on durable goods suggest that higher rates are starting to cool the excess demand permeating Canada’s economy. And August’s CPI report is a step in the right direction for inflation. But the Bank is not taking its foot off the gas just yet. Short-term inflation expectations remain ominously elevated. Fortunately, long-term inflation expectations remain relatively stable, which suggests that consumers believe that the Bank’s strategy will eventually be successful in bringing inflation down.