Canada CPI higher in August -- but not for food

Last week, Prime Minister Justin Trudeau summoned the heads of Canada's major grocery chains to a special meeting in Ottawa, threatening them with unspecified measures if they did not come up with a plan to curb rising prices. That meeting duly took place on Monday, although Trudeau was otherwise engaged and his deputy, Finance Minister Chrystia Freeland, could only be bothered to attend the meeting for two minutes. 

Given that grocery price inflation has been visibly slowing in recent months, why is the Government suddenly leaning on the retailers? We may have got an answer to that this morning. As part of the release of CPI data for August, Statistics Canada reported that grocery prices actually fell 0.4 percent month-on-month.  That dropped the year-on-year gain, which topped 11 percent earlier this year, to 6.8 percent, the lowest reading since January 2022.  Is it too, too cynical to assume that the government, with some kind of a heads-up from StatsCan about the data, leapt into action so as to be able to claim credit for something that was already well under way?  Perish the thought. 

The rest of the report, particularly the headline number, is less reassuring, though as usual there are special factors at play.  The headline number rose sharply to 4.0 percent in August from 3.3 percent in July, the second straight increase.  As was the case in July, the result was heavily influenced by base effects in the price of gasoline, which rose 4.6 percent in the month. This pushed the year-on-year change to a 0.8 percent increase in August from a 12.9 percent decline in July.  There is not much the Bank of Canada can do about that. 

On the other hand, shelter costs are definitely within the Bank of Canada's purview, and are continuing to add to overall inflation levels. Specifically, the mortgage interest cost index accelerated further in August to 30.9 percent year-on-year. StatsCan also observes that a higher interest rate environment, which may create barriers to homeownership, put upward pressure on the (rent) index.  Rents rose 6.5 percent year-on-year in August, up from 5.5 percent in July. 

The various special indices calculated by StatsCan serve to confirm the Bank of Canada's fears that getting inflation all the way back to the 2 percent target will be challenging. CPI ex food rose 3.5 percent year-on-year, while the index excluding food and energy rose 3.6 percent.  Moreover, two of the Bank's three preferred measures of core inflation, which had been edging lower for most of the year, moved slightly higher in August. 

There will be one more monthly CPI reading before the Bank of Canada's next rate setting, scheduled for October 25. For the moment, markets are seeing a 50/50 chance of another rate hike at that time.  Given that higher rates are contributing significantly to inflation (mainly via the shelter index), a further rate hike seems almost perverse. However, the Bank of Canada will have to weigh that against its own credibility and the credibility of the whole inflation targeting framework.