Canadian inflation is heading in the wrong direction as rising energy costs return. The Statistics Canada (Stat Can) Consumer Price Index (CPI) shows annual growth accelerated in August. It was the second month inflation accelerated, leading to the loss of the briefly-held title of “lowest inflation in the G7.” Economists expect inflation to continue rising in the near-term, putting even more pressure on the central bank to hike rates further.
Canadian Inflation Is Accelerating, Not Slowing Down
Canadian inflation is heading in the wrong direction. Headline CPI saw annual growth climb 0.7 percentage points (ppts) to hit 4.0% in August. It was the second consecutive month to see inflation rise, after bottoming at 2.8% annual growth in June.
Core inflation strips away volatile components like energy, and is preferred by the central bank. Even by this measure, CPI-median (+0.2 ppts), and CPI-trim (+0.3 points) is still moving higher. Excluding volatile components still saw inflation accelerate, meaning this is a broad issue.
Canadian Inflation Is Being Driven By Gas Prices & Rents
CPI’s accelerating annual growth was primarily driven by gasoline prices and shelter—rents in particular. CPI’s gasoline index increased (+0.8 ppts), and was the first in the past year. Rising crude prices tend to do that.
Shelter costs were the other big driver this month, hitting 6.0% annual growth in August. Stat Can attributed this to the rent index, which accelerated 1 ppt to 6.5% in August. Growth remains substantial in other areas, but didn’t accelerate quite like rents.
Canadian Inflation Is Expected To Continue Accelerating
Canadian inflation is on track to accelerate even further in the next report. Earlier this month, BMO warned that rising gasoline prices were set to drive August CPI much higher. That proved true, and rising gasoline prices are just getting started.
“The bad news is that here in September, they [gas prices] are now running at more than 10% above year-ago levels, so next month’s headline reading is likely going higher,” said Douglas Porter, chief economist at BMO.
Porter sees this applying more pressure on the central bank. “Things just got a lot more interesting for the Bank of Canada, and most definitely not in a good way. 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,” he said.
Adding, “Unfortunately, we suspect that with oil firing higher and core inflamed again, that report will be no better than today’s—second verse, same as the first, a little bit louder and likely a little bit worse.”
Canada Is No Longer The Lowest Inflation In The G7… Not Even Close To The G20
Canada has made quick progress on peak inflation. Up until two months ago, Canada had the lowest headline inflation of any G7 country. It became a point of pride for policymakers.
That’s changing very quickly. “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,” explained Porter.
Comparing absolute inflation numbers makes little sense across countries, anyway. Different methodologies for the calculations, and varying collection quality are the primary issues. The same currency is used in 3 of the G7 countries, ensuring currency-related headwinds impact them similarly. This amplifies the issue of a narrow comparison, since there’s only four currencies in the G7. It’s kind of like comparing your looks to just your siblings—you might be the best looking, but you all might be ugly. Let’s broaden the context to at least the G20.
Most importantly, different countries have different target inflation rates. Just because a country is an advanced economy, doesn’t mean it has the same needs as another. Hitting 4% inflation is double Canada’s target rate, and considered high. However, it would be right on the target for India, and achieve desired stability.
Central banks set their targets at a point that anchors expectations, according to the BoC. It could easily be 3 or 5 percent, ultimately settling at whatever the population considers “normal.” With that new knowledge, looking at how far off headline inflation is from the target may provide more context into progress.
At double the target rate, Canada has a lot of progress to make on achieving its target. Not even close to the best performer in the G20, with most countries closer to target. However, it’s not the furthest away from its goal either. It’s a fairly middle of the road performance, boosted by the adoption of a model that National Bank warns will persistently underreport inflation.