Inflation likely gained pace in August, economists expect, reversing progress

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Economists are forecasting that inflation reaccelerated to around 4 per cent last month, reversing previous progress made as gasoline prices push inflation higher.

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

Canada’s inflation rate tumbled to 2.8 per cent in June, entering the Bank of Canada’s target range of 1 per cent to 3 per cent for the first time since March, 2021. The celebrations on reaching that benchmark were short-lived, however, as inflation ticked up the next month.

Desjardins managing director and head of macro strategy Royce Mendes said he expects headline inflation to come in at 4 per cent for August, up from 3.3 per cent in July.

“We’re expecting that the CPI data will reveal that Canadians’ pocketbooks were hit by higher prices, again, largely the result of gasoline prices,” Mr. Mendes said.

The price of oil rose steadily throughout the summer, surpassing US$90 a barrel last week. By comparison, June prices were hovering near US$70 a barrel.

Meanwhile, TD anticipates inflation rose to 3.8 per cent. Executive director of economics James Orlando said another factor likely contributing to higher inflation in August is the fact that inflation started to decline a year ago.

“We saw a decline in inflation last year, which means there’s going to be some base [year] effects that are going to play out to a higher inflation reading next week,” he said.

The Bank of Canada has kept the door open to more rate hikes in part because it expects getting inflation down to 2 per cent will take some time. But economists say the recent slack in the economy will likely convince the central bank to remain on the sidelines.

Earlier this month, the Bank of Canada opted to hold its key interest rate steady at 5 per cent after hiking rates at its two previous meetings. The decision was made after recently released data showed the economy contracted in the second quarter.

There are other signs of softening in the Canadian economy as well: The labour market is no longer as tight as it was a year ago as job vacancies fall and the population grows.

Mr. Orlando said the fact that the economy is slowing gives the Bank of Canada justification to hold interest rates where they are, even if inflation is ticking higher in the short term.

“All the things that you worry about that could lead to greater domestic inflation in Canada … those are starting to show very rapid slowing in the Canadian economy,” Mr. Orlando said.

Although progress on getting inflation down is showing signs of stalling, economists and the Bank of Canada expect that tighter economic conditions caused by higher interest rates will eventually lead to smaller price increases.

“While we’re not yet seeing convincing evidence that underlying inflationary pressures are moving towards the 2-per-cent target from where they’ve been stuck for some time now, I believe that it’s just a matter of…