You sure about that, Tiff?

 A week ago I noted that the newly-released Canadian employment data for August looked reassuring from the Bank of Canada's viewpoint. A second strong month of employment growth seemed like evidence that the fall in GDP around mid-year was, as the Bank maintained, a temporary setback. Inflation, though? That may be a different matter.

This past Wednesday, Statistics Canada reported that headline CPI rose 4.1 percent in the year to August, up from  3.7 percent rise in July. That was well above consensus expectations and represented the fastest gain since 2003. As CPI has moved steadily higher during this year, StatsCan's commentary has generally focused on "base effects" -- a lot of prices, with gasoline at the forefront,  plummetted in the first wave of COVID, and year-on-year numbers were inflated as more "normal" prices were re-established.  Now the wording is different. The second sentence of StatsCan's press release says the August bounce "mainly stems from an accumulation of recent price pressures and from lower price levels in 2020".

The Bank of Canada has regularly expressed confidence that the rise in inflation is the result of transitory factors. That argument holds as long as base effects bear the brunt of the blame, but that "accumulation of recent price pressures" is another matter.  Gasoline prices are still a major wild-card, rising 32 percent from a year ago, but there is now much more to the story.  In August, seven of the eight sub-categories in the index moved higher.  On a seasonally adjusted basis, headline CPI rose 0.4 percent from July to August which, if it persisted, would annualize to an even faster rate than we have seen so far this year.

The Bank of Canada, as we know, likes to look through short-term trends and movements in volatile components such as gasoline. For that purpose it uses three "preferred measures" of inflation, which StatsCan faithfully computes and publishes each month. Those measures are no longer providing much comfort. All three ticked higher in August, and their mean value is now above 2.5 percent.

The 2 percent inflation target has been the Bank of Canada's lodestone for decades now. Every governor has reiterated that keeping inflation expectations anchored at that level is a key policy goal. It is completely understandable that the Bank wants to reassure itself that the deflationary effects of the COVID pandemic have passed before it contemplates any significant removal of monetary stimulus. However, each month of rising inflation, and the apparent broadening of price pressures, erodes the hard-won credibility of the inflation target just a little further. Governor Tiff Macklem and his colleagues need some good news on the inflation front, sooner rather than later.