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In August, Carbon Tax Repeal Continued to Remove Fuel from CPI Growth

Canadian Economics

By: Kiefer Van Mulligen

    

In August, the Consumer Price Index (CPI) rose by 1.9 per cent (y/y). This was higher than July’s 1.7 per cent (y/y) increase.

  • Gasoline prices rose by 1.4 per cent month-over-month but were 12.7 per cent lower than a year ago. Food price growth accelerated to 3.4 per cent (y/y) following a 3.3 per cent increase in July.
  • Core CPI (excluding food and energy) grew by 2.4 per cent in August (y/y), down slightly from 2.5 per cent in July. Rent and mortgage interest costs remain key contributors to year-over-year CPI growth.
  • On a seasonally adjusted basis, the CPI rose by 0.2 per cent from the previous month (following a 0.1 per cent increase in July).
  • The average of the Bank of Canada’s two preferred core inflation measures remained at 3.1 per cent (y/y) in August. CPI-median was steady at 3.1 per cent, while CPI-trim fell from 3.1 per cent in July to 3.0 per cent in August.

Key insights

  • Canada’s CPI grew by 1.9 per cent in August, with year-over-year growth remaining below the Bank of Canada’s 2.0 per cent inflation target for the fifth consecutive month. The removal of the carbon tax continued to keep energy prices lower than at the same time last year, easing overall inflation. In August, gas prices were 12.7 per cent lower (y/y). Excluding gasoline, the CPI grew by 2.4 per cent (y/y), down from 2.5 per cent in July.
  • Meanwhile, the pace of rent price growth, although elevated, also resumed its downward trend in August, rising by 4.5 per cent (y/y). Over the next two years, slower population growth will ease demand for rental space and taper the inflationary impact of rent costs.
  • Even as its preferred measures of core inflation remained broadly steady in August, the Bank of Canada will trim interest rates tomorrow. With the removal of many Canadian counter-tariffs in September, there is less potential inflationary pressure simmering in the economy. In the context of the Canada—U.S. trade conflict, these counter-tariffs would have had the most immediate impact on consumer prices in Canada. While some countermeasures remain, the cumulative impact will be lower than anticipated only a month ago. Meanwhile, the unemployment rate reached 7.1 per cent in August. The potential for economic slack to increase amid the trade conflict, particularly in export-oriented industries, suggests there is limited upside risk to inflation and gives the Bank greater scope to ease rates.

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