August inflation hits 4%, increasing chance of October rate hike
The fight against inflation has taken another blow, with stubborn gas and shelter costs pushing the consumer price index higher than expected in August.
The latest numbers from Statistics Canada report headline CPI increased 4% on an annual basis last month, following the 3.3% recorded in July, and marking the quickest uptick since April. On a monthly basis, the index increased 0.4%. The “core” inflation measures – which are closely monitored by the Bank of Canada – also increased, with the trim up by 3.9%, and the median rising 4.1%. That’s led to the three-month trend increasing to 4.5%, well outside of the central bank’s comfort zone.
Rising mortgage and gas costs the main factors behind high inflation
It’s the second month in a row that inflation gains have surprised on the upside, as economists had largely called for a 3.7% - 3.8% increase. According to the data, gas prices are up 0.8% year over year – the first annual increase since January 2023, and up 4.6% on a monthly basis as a result of higher prices for crude oil following production cuts from major oil-producing countries.
Shelter prices – particularly rent costs – were also a major contributor to the higher headline number, rising 6% year over year, following 5.1% growth in July, as rent increased in eight provinces.
This is being further compounded by rising interest rates, which have made it increasingly prohibitive to buy a home; priced-out would-be buyers are being forced to remain in the rental market, adding to supply pressures and rising costs. The mortgage interest cost index rose to 30.9% in August, slightly higher than 30.6% in July.
Also read: Home affordability declined in August, despite lower home prices
Grocery costs saw some slight relief, rising 6.9% in August compared to 8.5% in July, and dipping -0.4% month over month; however, as StatCan points out, this is still elevated and poses financial challenges for many Canadians.
Increased chances of an October rate hike
Of course, today’s steeper-than-expected print raises fresh doubt over the Bank of Canada’s next move; the central bank had opted to hold its trend-setting interest rate at 5% in its most recent September announcement, citing optimism that inflation was slowing.
However, it was adamant that course could change should economic data disappoint; the August CPI may mean an 11th rate hike could be in the cards come October. According to Bloomberg, overnight swap bets on a hike next month have increased to 50%. Bond yields have also soared on the news, with the five-year government yield broaching the 4.2% range.
“Things just got a lot more interesting for the Bank of Canada, and most definitely not in a good way,” writes Douglas Porter, Chief Economist and Managing Director of Economics at BMO.
“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,” he adds, “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.”
Also read:
- Mortgages and inflation: How do they affect each other?
- CREA update: August market returned to “better balance” due to improved listings
- How affordability declined in August despite lower home prices
- Bank of Canada holds target interest rate at 5% in October announcement
- Rate pain felt in the GTA as August home sales slide