Behind the curve?

Statistics Canada reported this morning that Canada's consumer price index (CPI) jumped 0.5 percent in July, raising the year-over-year rate to 3.0 percent from 2.5 percent in June.  This marked the largest annual increase since 2011 and was way above the consensus expectation, which had seen the year-on-year rate remaining stable. The data promptly boosted the Canadian dollar as traders priced in a higher likelihood of a further rate hike by the Bank of Canada, possibly as soon as September.

All eight major components of the CPI rose in July, which sounds ominous, but in truth, the key culprit for this surge was the transportation index, which rose 8.1 percent in the year to July, compared to 6.6 percent in June.  Within that index, the key component was the price of gasoline, up 25 percent in the year, a development which StatsCan attributes to rising international crude oil prices and supply disruptions. 

Retail fuel prices in Canada are remarkably volatile because retailers are generally competing for supplies with US border states.  In my own region, right against the New York State border, gas prices are now fully 10 percent lower than they were in July.  This may suggest that the upward pressure seen this year is starting to wane, although of course it would only take a supply disruption (such as a hurricane in the Gulf of Mexico) to set prices rising again.

Has the Bank of Canada fallen behind the curve in its efforts to keep inflation at a 2 percent pace?  Looking beyond the headline figures, the answer still appears to be "no".  The average annual increase in the Bank's three favoured core inflation measures was virtually unchanged in July, merely edging up to 2.0 percent from 1.96 percent in June.  That certainly does not suggest that the Bank has much scope for complacency here. but it should give it the luxury of waiting a little longer to determine whether the July blip really is the result of one-off factors.  It remains likely that the next 25 bp rate hike will come in October rather than September.