CPI data lock in Bank of Canada rate hike

As (not so) exclusively predicted here, the year-on-year rise in Canada's headline CPI edged lower in August, falling to 2.8 percent from 3.0 percent in July.  The slight deceleration was largely the result of a slowing rate of increase in retail fuel prices, though these remain the largest contributor to the increase in the headline number.  Excluding gasoline, the year-on-year rise in CPI for August was 2.2 percent, the same as in July.

Despite the slight moderation in headline inflation, the details of the report make it all but inevitable that the Bank of Canada will move to tighten its policy rate by a further 25 basis points in October. In particular:

• Although, as noted, the transportation sub-index (which includes gasoline) was the largest contributor to the overall gain, all eight of StatsCan's sub-indices were higher in the month.  This suggests that while inflationary pressures remain relatively well-contained, they are widespread and cannot be attributed solely to one-off factors.

• All three of the Bank's core measures now stand at or above the 2 percent target inflation rate.  This is the first time this has been the case since 2012.  If the Bank wishes financial markets to take these measures seriously, it almost has to respond to this.

So, a rate hike at the Governing Council meeting on October 24 looks just about certain, but with one caveat.  The possibly illusory September 30 deadline for Canada to conclude its NAFTA talks with the US is approaching fast, with little sign that a deal is at hand.  There are political reasons (notably a Quebec election set for early October) why the Trudeau government might prefer to hold off on announcing a deal until mid-month, but it is unclear whether the US side can accede to that.

If the NAFTA talks fall apart amid recriminations in the next few weeks, if the Canadian dollar takes a hit, and if Trump revives his threat to impose auto tariffs, the Bank might feel it has no choice but to hold back on a rate hike.  That's not the most likely scenario, but it's far from an impossible one.