Canada: CPI annual inflation moderates in August – RBC Economics

Paul Ferley, Assistant Chief Economist at RBC Economics, notes that on a monthly basis the Canada’s overall CPI dropped 0.2% as the gasoline prices were down in the month though by a relatively modest 0.9%.

Key Quotes

“More unexpected was the 3.2% drop in fuel oil. Fruit prices dropped even more than expected reflecting domestic production coming to market.

Core prices provided no offset to declines elsewhere as they remained unchanged in August relative to July. Unexpected weakness emerged in a number of food components including meat prices which dropped 0.6%. Travel services failed to show a seasonal increase unexpectedly falling 0.8% following the outsized 5.6% surge in July. As well, auto prices dropped 0.8% thus adding further to the 1.9% decline in July. Most other components showed modest monthly increases.

Our Take:

The unexpected moderation in both overall and core inflation will likely keep the Bank of Canada wary as to the outlook for the Canadian economy. Earlier comments by the central bank have indicated some modest disappointment with respect to economic growth given a larger-than-expected 1.6% decline in Q2. However, much of the weakness was due to the temporary shutdown of oil sands production in the face of widespread wildfires in Alberta that will return growth to positive territory in Q3. As well, our forecast assumes that the current 0.50% level of the overnight rate, along with stimulative fiscal policy, will prove sufficient to sustain growth to an above-potential rate and thus back in line with the Bank of Canada’s forecast. This strength would also be expected to return inflation to the central bank’s 2% inflation target. As long as the economic data remains consistent with this outlook, the overnight rate is expected to remain unchanged through next year.”