EconoFACTS

September 20, 2022 | 09:20

Canadian CPI (Aug.) — Another Step Down a Long Road

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Canadian consumer prices fell 0.3% in August, a couple of ticks below expectations, and the biggest monthly drop in a little more than two years. That pulled inflation down to 7% from 7.6% y/y, and more than 1 ppt below the 8.1% hit in June. Policymakers will breathe a modest sigh of relief, though they're miles from being out of the woods with inflation still nowhere near target.

Gasoline prices had a huge impact once again, falling 9.6% in the month, alone pulling the headline down four ticks. Importantly, gasoline is on pace to drop another 8% in September. There was also a surprising 0.1% decline in shelter prices. A pullback in utilities (energy was the culprit here too), along with a drop in rent (which could be seasonal as they saw a similar decline last year), and other owner costs (e.g. realtor fees, etc.), drove the move in shelter. However, it wasn't all softness as mortgage interest costs surged 2.4% m/m, the biggest increase since 1981. With interest rates continuing to climb, there's surely more upside to come.

Looking at the broader categories, goods prices continue to come down the mountain, falling 0.8% m/m, though they're still up 8.5% y/y (from 9.6% in July). Services inflation slowed for the first time in about 18 months, thanks to the smallest monthly increase of the year. Still, at 5.5% y/y, it remains a long way from 2%.

All three of the core inflation measures slowed in August, with the average slipping to 5.2% y/y from 5.4%. The trim fell two-tenths to 5.2%, while the median dipped a tick to 4.8%. The common component slowed 0.3 ppts to 5.7%, but the prior month was revised up to 6%. Given the huge revisions we've seen in the common component in recent months, it's usefulness in providing a timely indication on inflation is questionable at best (and should arguably be discarded). Notably, CPI ex. food and energy slowed to 5.3% y/y, one full percentage point below the U.S. rate. Finally, CPI excluding gasoline, which the BoC specifically mentioned in their last policy statement, was up just 0.1% m/m, with the yearly rate calming 0.3 ppts to 6.3%.

Key Takeaway: This is about as good of an inflation report as we can hope for, especially after the strong U.S. figures out last week. The slowdown in the headline and all three core inflation metrics is a clear positive. Unfortunately, inflation remains far too high, and the breadth of price increases hasn't backed off much, if at all. Nonetheless, the path to tamer inflation is going to be long and winding, and this is a step in that direction. While there's still plenty of data to go before the next Bank of Canada policy decision, today's number will, for now, limit how much further tightening the market prices.

Chart 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics