Posthaste: Why Bank of Canada hike is not a done deal despite inflation 'head fake'
Good morning,
We were warned that the battle against inflation would get rough, but nonetheless, this week’s numbers were a gut punch for Canadians looking for interest-rate relief.
“There’s no sense sugar coating this one — it is not a good report for the Bank of Canada,” BMO chief economist Douglas Porter wrote after the data came out.
Consumer prices rose 0.6 per cent in July, pushing the headline rate to 3.3 per cent, a big comedown from June when the reading (2.8 per cent) fell into the Bank of Canada’s target range for the first time in more than two years.
While a modest uptick had been expected, Tuesday’s data “blew the doors off economists’ forecasts,” said Randall Bartlett, senior director of Canadian economics at Desjardins.
It also pushed Canada’s inflation higher than the United States for the first time since before the pandemic.
How did this happen?
A couple of “idiosyncratic factors” drove the gain, including a spike in Alberta electricity prices and higher airfares and travel services, said Bartlett in a note entitled “CPI head fake masks cooling under the hood.” Gas prices played a role as they fell less on a year-over-year basis than they did in June.
However, Bartlett argues that key measures that the Bank of Canada looks at showed signs of improvement. The Bank’s preferred CPI median and trimmed mean slowed slightly and its newest measure of core inflation which excludes shelter fell to 4.2 per cent annualized from 4.6 per cent in June.
“The modest slowing core CPI is a thin silver lining for policy makers in an otherwise strong CPI report,” said BMO’s Porter.
BMO economists like Desjardins’ believe the Bank of Canada would prefer to hold rates next month given that other data suggest the economy is
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