Economists Predict Inflation Accelerated in August, Reversing Prior Gains

Economists are predicting that inflation reaccelerated to around four percent last month, undoing previous progress made as gasoline prices pushed inflation higher.

Statistics Canada’s August consumer price index report, set to be released Tuesday, is expected to show the annual inflation rate rising for a second consecutive month.

In June, Canada’s inflation rate dropped to 2.8 percent, entering the Bank of Canada’s target range of one to three percent for the first time since March 2021. However, the celebrations for reaching this benchmark were short-lived as inflation ticked up the following month.

According to Royce Mendes, Desjardins’ managing director and head of macro strategy, he expects the headline inflation to reach four percent for August, up from 3.3 percent in July.

“We anticipate that the CPI data will reveal that Canadians’ pocketbooks were impacted by higher prices, primarily due to gasoline prices,” Mendes said.

The price of oil steadily rose throughout the summer, reaching over US$90 a barrel this week. In comparison, prices in June were hovering near US$70 a barrel.

TD is also anticipating a rise in inflation to 3.8 percent. James Orlando, executive director of economics, mentioned that another factor contributing to higher inflation in August is the fact that inflation started to decline a year ago.

“We witnessed a decline in inflation last year, which means there will be some base (year) effects that will result in higher inflation readings next week,” he said.

The Bank of Canada has indicated the possibility of more rate hikes, as it expects the process of reducing inflation to two percent will take some time. However, economists believe that the recent slowdown in the economy will likely persuade the central bank to maintain its current stance.

Earlier this month, the Bank of Canada decided to keep its key interest rate unchanged at five percent after previous rate hikes. This decision was made after recently released data revealed a contraction in the economy during the second quarter.

Other indications of a softening Canadian economy include the loosening of the labor market compared to a year ago, with job vacancies decreasing and the population growing.

Orlando stated that the economic slowdown gives the Bank of Canada reason to maintain interest rates at their current levels, even if inflation is temporarily rising.

“All the concerns that could lead to greater domestic inflation in Canada… are showing signs of rapid slowing in the Canadian economy,” said Orlando.

Although progress in reducing inflation is showing signs of slowing down, economists and the Bank of Canada believe that tighter economic conditions resulting from higher interest rates will eventually lead to smaller price increases.

“While we currently don’t have convincing evidence that underlying inflationary pressures are moving towards the two percent target, I believe it’s just a matter of time before these interest rate hikes have an impact on economic activity, enough to bring down inflation to two percent,” Mendes said.

Meanwhile, the Bank of Canada will have to address the rising inflation among Canadians following the release of the inflation report on Tuesday. Bank of Canada deputy governor Sharon Kozicki is expected to deliver a speech at the University of Regina.

Both Orlando and Mendes emphasized the importance for the central bank to explain why the year-over-year inflation number is not the sole indicator they consider. Other figures, like core measures of inflation that exclude price volatility, are particularly significant to the central bank.

“The seen number will be four percent, or something around that,” Mendes stated. “But the Bank of Canada needs to be clear about the usefulness of core inflation as a predictor of future inflation, or the usefulness of looking at other aspects of the economy.”