Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation decelerated to 2.0% in August, in line with the midpoint of the inflation target. The deceleration was mainly the result of lower gasoline prices and some base effects. Nevertheless, the average of the Bank of Canada’s core inflation measures eased again in August and remained below 3% (the upper band of the inflation target) for a sixth consecutive month.
In addition, while the breadth of inflationary pressures did not narrow in August, it remained around its historical norms. The share of components of CPI rising by more than 5% edged higher to 13% from 12.5% and the share of components increasing by more than 3% declined to 26% from 27%. Both measures are at their lowest since the start of 2021 (see Fig 1.). The mostly unchanged measures suggest that the easing in inflation in August was not broad-based.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures remains in line with the inflation target. As such, we observe that the 3-month annualized changes in five of the eight main CPI components are below 3% (see Fig. 2), with the 3-month annualized changes in headline CPI at 2.0%.
Moreover, the momentum of BoC’s core measures eased to 2.4% on average, and it is the seventh consecutive month that the momentum in BoC’s core measure of inflation has been at or below 3.0% (see Fig 2).
Overall, the Bank of Canada will welcome today’s report as it confirms that inflation continues to ease. Moreover, the breadth of inflationary pressures and the momentum of core inflation suggest a lack of underlying inflationary pressures. It is becoming clear that inflation is no longer the main worry for the BoC. As Gov Macklem mentioned over the weekend, the central bank is focusing on the downside risks to growth. Moreover, his comments that “it could be appropriate to move faster [on] interest rates”, suggests two things: 1) the door is wide open to a 50bp and the hurdle to make a bigger cut is as high as we thought, and 2) that the BoC could be considering bringing its policy rates towards neutral faster than we expected. With this in mind, we believe that the probability of the BoC cutting by 50bp in October (and at any other meeting afterwards) is around 50/50. With the resilience in the labour market holding the economy together and allowing the economy to adapt to higher interest rates (see It’s a “Me-cession”, not a recession and Will it be a hard landing or a soft landing? The labour market will decide), some continued lacklustre employment reports (on October 11th) will likely determine whether the BoC cuts by 25bp or 50bp.
In Alberta, inflation eased to 2.0% in August. A deceleration in shelter costs and in transportation costs, due to lower gasoline prices, were the main source of easing in inflation. As such, shelter costs decelerated to 3.9% y-o-y, contributing 1.0pp to inflation due to a decline in electricity and natural gas prices over the past year. Food price inflation was unchanged and remained one of the main sources of inflation, adding 0.6pp to headline inflation. Inflation excluding food and energy (a core inflation measure) was unchanged at 3.0%, remaining above the national measure and the highest amongst the provinces with BC. We also note that Alberta is the only province with Saskatchewan where gasoline prices are higher compared to the same month last year.
The Consumer Price Index (CPI) eased by 0.2% non-seasonally-adjusted in August and the inflation rate eased to 2.0%, directly on target and its lowest since February 2021. This was in line with our expectations. The decrease in prices in August was mainly the result of lower gasoline prices (-2.6% m-o-m), intercity transportation (-8.1% m-o-m), travel services (-3.1% m-o-m) and clothing (-2.2% m-o-m). These monthly increases were partly offset by continued increases in rent (+1.0% m-o-m).
On a year-on-year basis, five of the eight major CPI components decelerated in August. Shelter cost inflation eased to 5.3% from 5.7% and remained the main source of inflation, contributing 1.6pp to headline inflation, mainly due to higher rent (contributing 0.6pp) and mortgage interest costs (contributing 1.1pp).
Transportation costs inflation was decreased to -0.1% from 2.0%. This deceleration was due to lower gasoline prices (-5.1% y-o-y), a base effect and lower motor vehicle costs (-1.4% y-o-y) compared to last year, mainly the result of a decline in used car prices.
Clothing and footwear costs declined by 4.4% y-o-y, compared to -2.7% in July, and were the main drag on inflation, subtracting 0.2pp to the headline. A decline in prices in August due to larger discounts to entice demand explains the decline in clothing and footwear prices. Similarly, household operations, furnishing and equipment was a drag on inflation, with the component declining by -0.4% y-o-y and reducing inflation by 0.1pp, as communication prices eased again in August.
Food price inflation was unchanged at 2.7%, contributing 0.5pp to inflation because of continued increases in restaurant costs and higher meat and vegetable prices.
In August, goods price inflation eased to -0.7% from +0.3%, while service price inflation eased slightly to 4.3% from 4.4%. Energy prices are 4.7% lower compared to the same month last year, after increasing 0.4% y-o-y in June. Excluding food and energy, prices eased 0.1% m-o-m in August and increased by 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, edged lower to 1.5%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they all eased in August and are at their lowest level since the start of 2021. CPI-Trim declined to 2.4% from 2.7%, while CPI-Median decreased to 2.3% from 2.4%. As a result, the average of the two measures inched lower to 2.35%, below 3% for a sixth consecutive month and their lowest level since April 2021.
In Alberta, prices decreased 0.1% m-o-m but inflation eased to 2.0% in August. Four out of eight CPI components decelerated on the month. Shelter costs decelerated, increasing 3.8% y-o-y compared to 4.9% y-o-y in July. Nevertheless, it remains the main source of inflation, contributing 1.0 percentage points to inflation. The easing in shelter costs was due to slower increases in utility costs compared to last year, especially electricity (-39.9% y-o-y) and natural gas (-10.9% y-o-y). On the flip side, rent costs accelerated slightly to 12.5% y-o-y (contributing about 0.7pp to inflation) and are rising faster than in any other province.
Food price inflation was unchanged at 3.5% y-o-y and remained an important source of inflation in the province, contributing 0.6pp.
Transportation costs decelerated to 2.1% compared to last year, as a result of slower gasoline price increases. The component contributed 0.4pp to inflation in July. Interestingly, Alberta is the only province with Saskatchewan where gasoline prices are higher compared to a year ago.
Household operation, furnishing and equipment costs were a smaller drag on inflation in August, declining 0.6% y-o-y. As a result, the sector reduced inflation by 0.1pp. Similarly, clothing and footwear prices fell 1.9% y-o-y, reducing inflation by 0.1pp.
Goods prices declined 0.9% y-o-y from -0.2% y-o-y, while services prices decelerated to 4.9% y-o-y from 5.3%. Inflation excluding food and energy was unchanged at 3.0%, higher than the national measure and the highest of all provinces. Energy costs eased further to -9.3% y-o-y from -3.0% y-o-y.
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Independent Opinion
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