Canada’s August inflation jumps to 4%

OTTAWA  -Canada’s annual inflation rate in August jumped to 4 percent from 3.3 percent in July on higher gasoline prices, data showed on Tuesday, a sign the central bank may be forced to raise interest rates yet again after 10 hikes since March of last year.

Analysts polled by Reuters had forecast that inflation would hit 3.8 percent. The consumer price index rose 0.4 percent on a month-over-month basis in August, Statistics Canada said, compared with a predicted 0.3 percent gain. Two of the three core inflation measures also rose.

The annual rate, the highest since the 4.4 percent reported in April, is double the Bank of Canada’s 2 percent target. The main driver was a 0.8 percent year-on-year increase in gasoline prices, which had dropped 12.9 percent in the 12 months to July.

“We have got to avoid overly strident opinions that the bank is done with rate hikes and be more circumspect, follow the evidence,” said Derek Holt, vice president of capital markets economics at Scotiabank. “I still think we need to leave the door very much open to further rate hikes, plural.”

Holt highlighted gains in two of the Bank of Canada’s three core measures of underlying inflation – CPI-median edged up to 4.1 percent from 3.9 percent in July while CPI-trim rose to 3.9 percent from 3.6 percent.

Bank of Canada Deputy Governor Sharon Kozicki in a speech after the data were released said “ups and downs of the size we’ve seen in the past couple of months are not that unusual,” which is why the central bank focused on measures of core inflation.

“Underlying inflation is still well above the level that would be consistent with achieving our target of 2 percent CPI inflation,” she said.

Money markets raised bets for a rate hike in October after the data, seeing a 42-percent chance of an increase after the price figures compared with 23 percent before.

The Canadian dollar was trading 0.6 percent higher at 1.34 to the greenback, or 74.63 U.S. cents, after touching its strongest level since Aug. 10 at 1.3383.

However, another inflation report and a bevy of other data are due out before the Canadian central bank next meets on Oct 25 to set the key overnight rate.

“We still think the chance of a rate hike is low as we feel that they have stopped with the cycle,” said Jimmy Jean, chief economist at Desjardins Group. “The economy is slowing and the unemployment numbers seem to be inching high, so those are important things that matter.”

Shelter prices in August increased 6 percent after a 5.1 percent advance in July, pushed up in part by rising rents and higher interest rates.

Canadian Prime Minister Justin Trudeau’s government on Tuesday is presenting legislation aimed at spurring the construction of rental properties amid a housing crunch.

The country’s five major grocery chains on Monday agreed to help the government in its bid to stabilize soaring prices after meeting with the industry and finance ministers.

“There was evidence that inflationary pressures at grocery stores are easing,” said Andrew Grantham, senior economist at CIBC Capital Markets, as food-price inflation at stores eased to 6.9 percent year on year in August from 8.5 percent year on year a month earlier.

Bank of Canada Governor Tiff Macklem, noting an increase on oil prices, on Sept. 7 predicted that “headline inflation is going to go up in the near term before it eases.”

The central bank held its key overnight interest rate at 5 percent on Sept. 6, noting that the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.