September 15, 2021 | 09:20
Canadian Inflation Tops 4%: This "Auto" be Concerning
Canadian consumer prices took no summer break, rising 0.2% in August which was enough to bump up the annual inflation rate four ticks to 4.1%. That's the fastest pace since 2003, and is counter to the small moderation seen in yesterday's U.S. headline rate. (Brief timeout for a victory lap: The August reading was a couple ticks above consensus, but right in line with our call.) Also in direct contrast to the U.S. result was that the biggest sources of strength in the month for Canada were the reopening sectors: Airfares soared 37.5% m/m and hotel charges jumped 12%. In turn, this put more pressure on the core, with all three of the BoC's measures moving higher (with the average gain 2.56% y/y). Still, there is something for everyone in the Bank's cores, running from a scalding 3.3% pace for the trim, to as low as 1.8% on the common.
On the yearly pace, it's mostly the usual suspects on the murderer's row of inflation pressures. Gasoline prices were up 32.5% (even with a small monthly gain), new homes at 14.3%, and hotels at 19.3% y/y. In addition, all big consumer durables are stoking inflation, driven by both hot demand and supply challenges. Autos are the most obvious example of both, and new vehicle prices are now up 7.2% y/y—that's the fastest since 1994, and is not due to low base effects (the 2-year annualized rise is nearly 5%). Also adding to the mix are food prices, which showed some real pop last month after a lull (and up 2.7% y/y). Meat prices are on a roll (6.9% y/y), but restaurant meals are also sparking higher (3.2%) with wage pressures weighing in for that group.
Looking ahead, this may be close to the peak (emphasis on "may") for headline inflation as the base effects turn a little less challenging after next month's report. That being said, the sustained strength in energy prices, rumbling food costs, and ongoing gains in home prices (they were still up 21.3% y/y in today's home sales release from CREA) will keep the flame under headline inflation for some time yet. More fundamentally, the tightening labour market—and we saw record hiring intentions from the Manpower survey yesterday—point to rising wage pressures, which could make higher prices linger for longer. And note that the latest monthly bump in inflation carried across all 10 provinces, highlighting the widespread nature of the inflation rise, both by sector and by region.
Bottom Line: Inflation weighed in a bit heavier than consensus expected in August, rising to its fastest annual clip since 2003. Some of the meaty rise was driven by reopening pressures, some by base effects (the two-year trend is a much milder 2.1%), and some by (presumably temporary) supply chain issues. Still, rising wage pressures, robust home prices, and firm energy costs all suggest that inflation is not about to quickly roll over as these other short-term factors fade. We continue to expect inflation to average close to 3% both this year and next, at the very high end of the BoC's target zone. The Bank expected inflation to average 3.9% in Q3 (in their July MPR), so this won't be shock—but that certainly doesn't suggest policymakers are comfortable with this hot pace. Between last week's solid jobs rise and today's 4%+ inflation reading, it looks like they will stick to the tapering timeline.