Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation moderated in August, for a second consecutive month, but remains elevated at 7.0%. Most of the moderation can be linked to a decline in gasoline prices over the period. However, other components of CPI are moderating, as evidenced by a slight easing in most measures of core inflation. Nevertheless, inflationary pressures remain broad, with almost 80% of the components of CPI rising at more than 3% y-o-y and more than 60% at more than 5% y-o-y (see Fig 1).
The recent trend in the CPI monthly changes suggests that inflationary pressures are easing. As such, the 3-month annualized change in most of the CPI components are now below their year-on-year changes, pointing to some deceleration in price increases (see Fig. 2).
While inflation is decelerating, it remains well above the BoC’s target of 2%, inflation expectations are rising, and inflationary pressures remain broad. With this in mind, we believe the Bank of Canada will continue to hike interest rates. In our view, the BoC will likely increase its policy rate by 50bp at the October meetings, despite the moderation in inflation and in the labour market. Whether there is a case for the BoC to hike again in December will depend on whether we start to see a narrowing of inflationary pressures and some easing of inflation expectations.
In Alberta, inflation dropped to 6.0%, lower than the national measure. As is the case nationally, most of the deceleration is due to a decline in gasoline prices. Nevertheless, inflation excluding food and energy (a measure of core inflation) also eased, to 4.9%. We note that core inflation in Alberta has been lower than in the rest of Canada, suggesting that inflationary pressures in the province are less intense than nationally.
The Consumer Price Index (CPI) decreased by 0.3% m-o-m non-seasonally-adjusted in August, weaker than expected. As a result, the inflation rate decelerated to 7.0%. Prices rose on the month in five of the eight major CPI components. The biggest increases were in health and personal care (+0.4% m-o-m), alcohol, tobacco and cannabis (+0.4% m-o-m), and clothing and footwear (+0.3% m-o-m). Prices dropped the most on the month in transportation (-2.5% m-o-m), mainly due to the second consecutive decline in gasoline prices (-9.6% m-o-m). Prices also declined in recreation, education and reading (-1.3% m-o-m) due to a reduction in the cost of recreational vehicles (-4.0% m-o-m). Shelter costs eased slightly in August (-0.1% m-o-m). The decline in transportation cost was the biggest contributor (-0.4pp) to the monthly reduction in CPI
Five of the eight major CPI components decelerated in August on a year-on-year basis, led by transportation costs. Transportation costs decelerated to 10.3% y-o-y, contributing 1.8pp to inflation, with gasoline prices being the primary source of cost increases in the category (+22.1% y-o-y contributing 1.0pp). Shelter costs decelerated to 6.3% y-o-y, as other owned accommodation costs inflation eased somewhat. Finally, food prices inflation accelerated to 9.8%, its highest since 1981, and contributed 1.6pp to inflation.
In May, goods prices inflation accelerated to 8.5% from 9.6%, mainly due to declining gasoline prices, and services inflation moderated slightly to 5.5% from 5.7%. Energy prices also decelerated, increasing by 19.0% since August last year. Excluding food and energy, prices were flat on the month and increased by 5.3% 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, also eased to 5.3%.
Looking at the BoC’s core measures of inflation,
All three measures of core inflation were lower in August, with CPI-Trim declining to 5.2 % from 5.4%, CPI-Median to 4.8% from 4.9% and CPI-Common to 5.7% from 4.5%. The average of the core measures decreased to 5.3% from 5.5%.
In Alberta, inflation dropped to 6.0% in August, from 7.4%. Transportation costs were the main reason for the sharp deceleration in August, as gasoline prices fell 17.0% m-o-m, pushing transportation costs to 8.5% y-o-y in August, compared to 15.5% in July. Shelter costs also decelerated to 4.7% y-o-y from 6.4% y-o-y, mainly due to lower natural gas prices. Nevertheless, natural gas prices are 26% higher than last year. Food prices increased on the month (+1.2% m-o-m) and are an important source of inflation, contributing +1.6pp. Goods price inflation edged lower to 8.5% and services price inflation to 4.7%. Inflation excluding food and energy moderated to 4.9%, while energy costs dropped 8.9% y-o-y compared to the same month last year, after 28.1% y-o-y the month before.
Independent Opinion
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