August 17, 2023
Canada’s annual inflation rate rose to 3.3 per cent in July, as economists warn the latest consumer price index report spells bad news for the Bank of Canada.
The uptick in price growth comes after inflation tumbled to 2.8 per cent in June, falling within the Bank of Canada’s target range of between one and three per cent for the first time since March 2021. “There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” said BMO chief economist Douglas Porter in a note to clients.
Inflation ticked up last month because gasoline prices fell less dramatically on a year-over-year basis than they did in June, Statistics Canada said. After a significant run-up in energy prices prompted by the Russian invasion of Ukraine, lower gasoline prices have largely driven the decline in inflation over the last year.
Now, other underlying price pressures need to ease for inflation to fall further. Porter notes gasoline prices are on pace to rise by five per cent in August.
The latest report has raised the odds of a rate hike next month, according to forecasters, despite other signs of economic softening, including rising unemployment. In an interview, RBC economist Claire Fan said the report simply was “not good enough,” in terms of marking progress against high inflation. And while Porter still expects the Bank of Canada to stay on the sidelines, he says “the inflation figures will make it a tougher call.”
As it gears up for its next interest rate decision slated for Sept. 6, the central bank will be paying particular attention to core measures of inflation.
RSM Canada economist Tu Nguyen says these figures help economists understand how quickly prices are rising across the economy, while excluding things that are more volatile. “Those numbers are going down very, very slowly, but they’re trending in the right direction. And that’s what the bank is going to base its interest rate decision on,” Nguyen said.
The Bank of Canada’s core measures of inflation are showing signs of improvement as the three-month average trends downward. Nguyen says she expects slowing core inflation and signs of a weaker economy to convince the Bank of Canada to hold its key interest rate steady.
