It's a gas, gas, gas -- again

Once again, the key mover in Canada's consumer price index for August was gasoline.  Data released this morning by Statistics Canada showed that headline CPI rose 1.9 percent year-on-year, down from a 2.0 percent rise in July. Gasoline prices were 10.2 percent lower than a year ago, compared to a 6.9 percent decline in July.  Recent events in Saudi Arabia may put an end to the weakness in energy prices, but the timing of StatsCan's monthly price surveys likely means that this will not show up until the October report.

To some degree, the fall in energy prices has been concealing a slight deterioration in Canada's underlying inflation outlook.  Excluding gasoline, CPI rose 2.4 percent year-on-year in August, the same pace as in July.  In a slightly unusual piece of editorializing, the press release noted that "broad-based gains in CPI over the past two quarters have coincided with strength in Canadian labour market conditions".  Even so, the Bank of Canada's three preferred measure of core CPI remain well-behaved, rising by almost exactly 2 percent in August, in line with the Bank's target.

All eyes are now on the US Federal Reserve, which is generally expected to announce a 25 basis point cut in the Fed funds target later today.  What do today's data tell us about the odds of the Bank of Canada following suit at the end of October?  In themselves, the CPI numbers are not enough to alter the Bank's policy stance.  However, there are mounting signs that the Trump-led tariff conflicts are taking a toll on the domestic economy. 

Yesterday StatsCan reported that Canadian manufacturing sales fell 1.3 percent in July, on the heels of a 1.4 percent fall in June. In real terms, sales fell 1.6 percent in July.  If the Fed indeed cuts rates today, there could be upward pressure on the Canadian dollar, which would further undermine the competitiveness of Canadian manufactures.  The Bank will look to signal any change in its policy outlook ahead of the October 31 Council meeting, but will have to be cautious about saying anything that could be interpreted as political in advance of the October 21 Federal election.