Canadian Inflation Slows Even as Core Price Measures Quicken

(Bloomberg) -- Canada’s inflation rate slowed in August after hitting a seven-year high as gasoline prices moderated, though underlying price pressures continued to inch higher.

The consumer price index recorded an annual pace of 2.8 percent during the month, in line with economist expectations, Statistics Canada said Friday in Ottawa. It had hit 3 percent in July on the back of higher gasoline prices. Core measures of inflation ticked up to an average of 2.1 percent, the fastest since February 2012.

The slowdown in headline inflation will reassure policy makers that the recent spike in gasoline prices and other products like air transportation is likely transitory. At the same time, accelerating core inflation suggests the narrative of an economy running up against capacity constraints and generating inflationary pressures still holds.

A 2 percent core rate is consistent with an economy at full capacity -- but not one that is overheating. The Bank of Canada -- which has raised borrowing costs four times since mid-2017 -- has been saying it will need to continue gradually increasing borrowing costs in order to keep inflation at that level. Swaps trading suggests investors have fully priced in another hike at a rate decision next month.

“This simply strengthens the case for the Bank of Canada to hike next month,” Doug Porter, chief economist at Bank of Montreal, said in a note to investors. It “also sets the table for further gradual hikes into 2019.”

Yields on Canadian two-year bonds rose 2 basis points to 2.2 percent from 2.18 percent following the report.

Canadian Inflation Slows Even as Core Price Measures Quicken

July’s 3 percent pace for overall inflation was at the upper end of the central bank’s 1 percent to 3 percent target range, and above what the Bank of Canada had been estimating.

In its most recent forecasts released in July, the central bank estimated inflation would average 2.5 percent in the third quarter before returning back to near the 2 percent target by 2019.