September 19, 2023 | 09:13
Canadian CPI: A Little Bit Louder, A Little Bit Worse
Canadian consumer prices rose 0.4% in August (and +0.6% on a seasonally adjusted basis), lifting the annual inflation rate to 4.0% from 3.3% in July and marking a second consecutive yearly rise. The result was a tick higher than our call, and fully two ticks above consensus. The news was no better on core trends, as they picked up across the board—trim rose to 3.9% y/y (from 3.6%), median was up 4.1% (3.9%), and ex food & energy rose 3.6% (3.4%). Equally concerning, the three-month trend on the core metrics all pushed up to around the 4-1/2% pace, or way too hot for the BoC's comfort; previously, the Bank had been concerned that underlying trends looked like they were stuck around 3.5%...which now seems almost quaint.
Details, details... After gasoline, the two biggest drivers of this high-side reading were mortgage interest costs (up 2.7% m/m and now up 30.9% y/y), and rent (+0.7% and 6.5% y/y). Combined with strength in some utilities costs, the overall shelter component rose at a piping hot 0.8% m/m, lifting it 6.0% above year-ago levels. Aside from food, that's the fastest rising major component. The one sliver of good news here was that grocery prices actually dipped 0.4% in the month, pulling the annual increase down to 6.9% (from 8.5%), the calmest pace since the start of 2022. While gasoline prices were the biggest swing factor in today's result, they were zero surprise at up 4.6% m/m, and now up a touch from year-ago levels. The bad news is that here in September, they are now running at more than 10% above year-ago levels, so next month's headline reading is likely going higher.
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. The early read on September inflation isn't great either, as the base effects remain challenging (prices rose by just under 0.1% a year ago) and energy prices remain on the march.
Bottom Line: 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. We will note that even excluding mortgage interest costs, prices are now up 3.2% y/y, or above the target band. There's still lots of data to go before the Bank next decides on rates (October 25), including another swing at the CPI. 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.