Inflation heated up more than expected in August, raising the odds of yet another Bank of Canada rate hike in October.

Headline CPI inflation came in at 4% in August, up from 3.3% in July and above the 3.8% expected by economists.

The rise was driven by higher gasoline and shelter costs, as well as the continued impact of base-year effects (due to lower gas prices a year ago).

“After briefly boasting the lowest inflation rate in the G7 (at 2.8% in June), Canada is now running above Japan and the U.S. pace, at least on the headline,” noted BMO chief economist Douglas Porter. “The early read on September inflation isn’t great either, as the base effects remain challenging (prices rose by just under 0.1% a year ago) and energy prices remain on the march.”

12-month change in headline inflation

On a monthly basis, headline CPI rose 0.4% in August following a 0.6% gain in July.

More concerning, say economists, is the rise in the Bank of Canada’s preferred measures of core inflation, which strip out volatile food and energy prices.

CPI-trim was up 3.9% year-over-year (from 3.6% in July), while CPI-median rose back to 4.1% from 3.9% last month. Looking at the three-month annualized change, these measures are up 3.9% and 4.4%, respectively.

“This is the fastest pace of near-term core price growth since April of this year,” noted Randall Bartlett, senior director of Canadian Economics at Desjardins. “…while some of this can be chalked up to a jump in energy prices, month-over-month changes in a broad suite of underlying inflation measures also advanced in the month.”

Shelter costs remain the top contributor to inflation

Rising shelter costs continued to be one of the main contributors to overall inflation, rising 6% on an annual basis, up from 5.1% in July.

Looking at the shelter sub-components, the gains were driven by the rent index, which was up 6.5% year-over-year, and the mortgage cost index, which advanced to +30.9% in August from +30.6% in July.

Statistics Canada said rent prices rose the fastest in Newfoundland and Labrador (+8.4%), Alberta (+6.5%) and Nova Scotia (+6.5%).

While this per capita index is up over 30% year-over-year, actual mortgage interest costs in dollar terms as of the second quarter have risen over 80% since the Bank of Canada started hiking interest rates, data released from Statistics Canada show.

Odds of an October rate hike rise to 50%

Following the release of the inflation data, the 5-year Government of Canada bond yield surged over 10 basis points, while markets raised the odds of an October rate hike to 50%.

“Things just got a lot more interesting for the Bank of Canada, and most definitely not in a good way,” wrote Porter. “There’s still lots of data to go before the Bank next decides on rates (October 25), 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.”

But for now, most economists continue to expect that the Bank won’t need to resort to an additional rate hike, which would bring its overnight target rate to 5.25%.

“If consumer spending remains sluggish and the unemployment rate continues to grind higher as we forecast, we still expect that the Bank will refrain from further interest rate hikes despite the strong current inflationary backdrop,” wrote CIBC’s Andrew Grantham.

Even still, Grantham says the underlying inflation pressures mean policymakers “will face some tough decisions” at its upcoming meetings.

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Last modified: September 19, 2023