Investing.com — Canada’s annual inflation rate held at 3% in August, matching July’s pace, as elevated energy costs continued to put pressure on consumers while food-price growth moderated only gradually, data showed on Monday.
The reading keeps inflation above the Bank of Canada’s 2% target and comes as the central bank weighs the competing risks of persistent price pressures and a softer economic outlook. The Bank held its policy rate at 2.25% earlier this month, its seventh consecutive decision without a change. Canada’s inflation rate staying at 3% gives the Bank of Canada little reason to declare victory over price pressures, particularly with oil prices rising again.
“”Canada’s 3% headline inflation rate will naturally attract attention, but I think the more important story sits underneath that number, because much of the pressure is still coming from energy while the Bank of Canada’s preferred core measures remain much closer to target, which tells us that this is not yet the kind of broad-based inflation problem that would force policymakers into an immediate response,” said Ryan Kirkley, CEO & Co-Founder, Global Settlement Network.
The August result was in line with economists’ expectations. Higher gasoline prices have remained a key driver of headline inflation, with gasoline prices still up sharply from a year earlier despite some relief at the pumps in August. RBC economists had expected headline inflation to remain at 3%, while underlying inflation was expected to stay close to the Bank of Canada’s 2% target.
The inflation picture is likely to face fresh pressure in coming months as crude oil prices have climbed toward and above $100 a barrel. That could raise gasoline and transportation costs and eventually feed into prices across the wider economy if elevated energy prices persist.
“For markets, I would be careful about reading this print as a major shift in the Canadian rate outlook on its own. If core inflation stays contained and the headline number starts easing as energy effects fade, the Bank has considerably more flexibility, but if we begin to see energy, tariffs and other external costs filtering into underlying inflation at the same time, that flexibility disappears pretty quickly. The next few prints should give us a much clearer sense of which of those paths Canada is actually on,” Kirkley added.
The risk is particularly important for the Bank of Canada because policymakers have warned that a prolonged rise in energy prices could spill over into broader inflation. At its September meeting, the central bank said inflation risks had increased, while noting that much of the recent price pressure remained concentrated in energy-related categories.
