Canadian Consumer Price Index (August 2023)

Inflation mercury spikes to 4% in August 

• Consumer price inflation heated up again in August to 4.0% on a year-on-year (y/y) basis, up from 3.3% in July, largely thanks to higher prices at the pump.
• Gasoline prices rose 4.6% on a monthly basis, thanks to higher prices for crude oil.  Prices at the pump are only up 0.8% versus a year ago, but base year effects – or the swing from -12.9% y/y in July – drove the acceleration in headline CPI.  
• Shelter was another key source of upward pressure on inflation in August, heating up to 6.0% y/y, up from 5.1% y/y in July, and 4.8% in June. The acceleration was led by rents which were up 6.5% y/y in August, up from 5.5% in July. 
• Food inflation took a step down in August to 6.9% y/y from 8.5% in July, as prices for groceries fell 0.4% m/m in August. However, that is still the highest pace of inflation of the eight main CPI categories.  
• Scratching beneath the surface, our measure of "supercore" inflation, or services inflation excluding shelter costs cooled to 1.2% y/y from 2.1% y/y in July, thanks to a massive drop in travel services costs. 
• Somewhat surprisingly, the Bank of Canada's underlying inflation measures also heated up in August. CPI-trim increased to 3.9% y/y from 3.6% y/y in July and CPI-median was 4.1% y/y, up from  3.7% y/y in July.
• Inflation for core goods appears to be behind the surprise in core inflation measures in August. Core goods inflation rose to 2.9% y/y from 2.6% in July. Notably, prices accelerated for clothing and footwear to 1.7% y/y in august from 1.0% in July.   

Key Implications

• Headline inflation moving back up to 4% on higher energy prices would likely be tolerated by the Bank of Canada. But, core inflation measures heating back up to 4% y/y, and 4.5% on a three month annualized basis is going to ring some alarm bells at the Bank. 
• August's inflation reading stands in contrast to other measures that have shown momentum cooling in Canada's economy. The housing market, and new home construction cooled in August, and the unemployment rate has risen half a percentage point over the past few months. Fortunately, the Bank of Canada will see another inflation report before it's next rate decision on October 25th. We expect further signs of slowing will help the Bank to continue to stand on the sidelines, as outlined in our recent forecast. However, today's inflation report has raised the odds they may need to make another move. 

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