Canada’s annual inflation rate accelerated sharply for the second month in a row, raising the odds that the Bank of Canada could deliver at least one more interest rate increase this year despite hitting pause on monetary policy tightening earlier this month.

The Consumer Price Index rose 4 per cent in August from a year earlier, up from 3.3 per cent in July and the highest annual inflation rate since April, Statistics Canada said Tuesday. Bay Street analysts were expecting inflation to clock in at 3.8 per cent.

The larger-than-expected increase was driven by gasoline prices, which have surged in recent months after oil-production cuts by Saudi Arabia and Russia. But it was more than just energy prices pushing up headline inflation.

Shelter costs accelerated for both renters and homeowners facing higher mortgage payments. While grocery prices grew less quickly in August than in July, food inflation remains far above most other components of the Consumer Price Index.

Most worrying for the Bank of Canada: Measures of core inflation, which filter out volatile price movements to capture underlying trends, moved markedly higher. The average of the central bank’s two preferred core inflation metrics hit 4 per cent in August, up from 3.75 per cent in July. That’s twice the central bank’s 2-per-cent inflation target.

“Underlying inflation is still well above the level that would be consistent with achieving our target,” Bank of Canada deputy governor Sharon Kozicki said in a speech Tuesday, where she reiterated that the central bank was prepared to raise interest rates further if inflation remains stubbornly high. The next rate decision is on Oct. 25.

Earlier this month, the central bank held its key interest rate steady after a string of data suggested economic growth had begun to stall in Canada. The bank has raised interest rates 10 times since March, 2022, pushing its policy rate to 5 per cent, the highest level since 2001. Higher interest rates make it more expensive for individuals and businesses to borrow money and service their debts, with the goal of reducing spending and curbing upward pressure on consumer prices.

Ms. Kozicki said there are signs that higher interest rates are working, and that “past increases in interest rates will continue to weigh on activity.” But she said the central bank is facing a fine balance: “We know that if we don’t do enough now, we will likely have to do even more later. And that if we tighten too much, we risk unnecessarily hurting the economy.”

Interest-rate swap markets, which capture market expectations about future Bank of Canada decisions, are now pricing in around a 40-per-cent chance of another quarter-point rate hike in October, according to Refinitiv data. Before Tuesday, market odds of another rate hike were about one in five.

“We all knew that the extended back-up in gasoline prices was going to be a headache for headline CPI and inflation expectations, but the inconvenient truth is that core has suddenly heated up as well,” Bank of Montreal chief economist Douglas Porter said in a note to clients. “There’s still lots of data to go before the bank next decides on rates … including another swing at the CPI. Unfortunately, we suspect that with oil firing higher and core inflamed again, that report will be no better than today’s.”

Source: The Globe and Mail