Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation accelerated to 1.9% in August, while the Bank of Canada’s preferred measures of core inflation eased slightly to 3.05%. The BoC’s preferred measures of inflation are at or above 3%, the upper band of the inflation target, for four of the past five months.
The breadth of inflationary pressures was relatively stable in August. The share of components of CPI rising by more than 5% was unchanged at 19% , while the share of components increasing by more than 3% rose to 38% from 37%. We note that the share of components increasing by more than 3% has been well above historical norms for most of 2025 (see Fig. 1) and is higher than during periods when inflation is at target, suggesting some stickiness and broad inflationary pressures.
The recent trend in CPI’s monthly changes suggests that the momentum in inflationary pressures eased slightly in August and the 3-month annualized changes of most CPI components are below 3% (see Fig. 2), with the 3-month annualized change in headline CPI is at +2.0%.
The momentum of BoC’s core measures was unchanged at 2.5% in August (see Fig 2). The measure had been at or above 3% for most of the first half of the year. The lower momentum in core inflation suggests that the stickiness in core measures and price pressures are consistent with the BoC’s inflation target.
We would also note that the momentum in goods prices, services prices and alternative measures of core inflation are all below 3%, suggesting that recent price dynamics are consistent with the BoC’s inflation objective.
Overall, the report suggests that headline inflation remains well within the inflation target. While core inflation remains marginally above the upper end of the inflation target, recent dynamics suggest some easing in the coming months. As such, we expect the BoC’s measures of core inflation to be below 3% in October. This should ease some of the BoC’s concerns regarding the stickiness of inflation.
In recent months, the BoC has put more emphasis on current inflation than on the amount of slack in the economy. However, with signs that the inflation is less sticky and the much bigger amount of slack in the economy than expected at the time of the July meeting, following a bigger contraction than projected in Q2, and two consecutive months of decline in employment and rising unemployment rate, the BoC will turn its focus on the weaker economy. As such, we expect the BoC to cut its policy rate by 25bp at tomorrow’s meeting and bring its policy rate to 2.00% by the end of the year, meaning additional cuts in October and December.
In Alberta, inflation edged up to 1.4% in August. Higher shelter costs (+2.5% y-o-y) and food prices (+3.0% y-o-y) continued to be the main source of inflation, while lower energy costs, due to the removal of the Carbon Tax, remained a drag. Inflation excluding food and energy (a core inflation measure) was unchanged at 2.6% and was only marginally above the national measure.
The Consumer Price Index (CPI) decreased 0.1% m-o-m non-seasonally-adjusted in August and the inflation rate accelerated to 1.9%. A decline in transportation costs and lower travel service costs were the main sources of price decreases in August, while higher appliance costs were the main source of price increases on the month.
On a year-on-year basis, five of the eight major CPI components accelerated in August.
Transportation costs were a smaller drag on inflation, with prices 0.5% y-o-y lower in August compared to -1.5% in July. Transportation costs reduced inflation by 0.1 percentage points (pp) in August, with gasoline accounting for a 0.4pp reduction.
Shelter cost inflation slowed to 2.6%, the lowest since March 2021, and remains the main source of inflation, contributing 0.8pp to headline inflation. This was mainly due to slower rent increases (contributing 0.3pp) and continues deceleration in mortgage interest costs (+4.2% y-o-y), contributing +0.3pp.
Food price inflation rose to 3.4% y-o-y, adding 0.1pp to inflation. Most of the acceleration is due to higher global prices for meat and take-out food.
Household operations, furnishings and equipment rose to 2.1% from 1.4% y-o-y in July. It increased inflation by 0.3pp and most of the increase is from household supplies for pets, kitchen, outdoor.
In August, goods price inflation rose to +0.7% y-o-y and service price inflation remained at 2.8% y-o-y. Energy prices were 8.3% lower compared to the same month last year, as the removal of the Carbon Tax in April means lower energy price levels. Excluding food and energy, prices declined 0.2% m-o-m in August and eased to 2.4% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, remained at 2.6% in August.
Looking at the BoC’s core measures of inflation, they were roughly unchanged in August and remained at the upper end of the BoC’s inflation target. CPI-Trim eased to 3.0%, while CPI-Median was unchanged 3.1%. As a result, the average of the two measures eased marginally to 3.05% from 3.10%, above 3% target.
By provinces, headline inflation was the highest in Quebec (+2.7%), Nova Scotia (+2.2%), Manitoba (+2.0%), and BC (+1.8% y-o-y), while it was the lowest in PEI (+1.1%), Newfoundland (+1.4%), Alberta (+1.4%), and New Brunswick (+1.6%).
Core inflation, or CPI excluding food and energy, is highest in Nova Scotia (+3.1%), Quebec (+3.0%), Saskatchewan (+2.9%), and Manitoba (+2.7%). It was the lowest in PEI (+1.4%), Newfoundland (+1.8%), BC (+2.0%), and Ontario (+2.2%).
In Alberta, prices were unchanged on the month and inflation accelerated 1.4% in August. Five out of eight CPI components accelerated on the month. Shelter costs eased to 1.7% y-o-y, from 2.5% y-o-y in July, its lowest since February 2021. Nevertheless, it remained one the main source of inflation, contributing 0.5pp. The decreasing pace of shelter cost inflation was due to a deceleration in owned accommodation (+3.0% y-o-y), rented accommodation costs (+3.2% y-o-y) and utilities (-7.4% y-o-y).
Food prices inflation rose to 3.0% y-o-y from 2.8% y-o-y, contributing 0.5pp to inflation. This was the result of the same trend seen nationally.
Transportation costs were a smaller drag on inflation at -0.9% y-o-y in August, after decreasing 2.5% y-o-y in June, reducing headline inflation by 0.2 percentage points. This was the result of a 15.0% y-o-y drop in lower oil prices.
Goods price inflation was -0.1% y-o-y in August after -0.1% y-o-y in July. Services price inflation inched higher to 2.8% y-o-y from 2.7% y-o-y in July. Inflation excluding food and energy was unchanged at 2.6%, only marginally above the national measure. Energy costs were a drag at -14.9% y-o-y compared to -16.0% y-o-y in July.
Looking for more? Subscribe now to receive Economic updates right to your inbox here!
Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.