Inflation Remained Elevated in August

In August, the Consumer Price Index (CPI) rose by 3.0 per cent year-over-year (y/y), matching July’s 3.0 per cent increase.

Key insights

Canada’s CPI growth remained elevated at 3.0 per cent (year-over-year) in August. With the conflict in the Middle East continuing to flare, disrupted global energy flows have kept oil and gas prices high. Despite a month-over-month decline, gasoline remained the main driver of CPI growth in August, while price growth for some energy-intensive services like air transportation continued to accelerate (up 15.0 per cent). Rent prices also picked up to 2.8 per cent from 2.5 per cent in July. Conversely, grocery price growth slowed to 2.8 per cent in August from 3.1 per cent in the previous month.

While oil prices have soared since March, core inflation remains stable. As energy and transportation costs ultimately factor into to the final price paid for many consumer goods, persistently elevated energy prices should be eventually passed through. However, there are few signs that this is happening broadly in Canada. Fresh fruit and vegetable prices—perishable goods that must be transported quickly—may be showing some signs of acceleration. But core inflation remained at 2.0 per cent in August, suggesting that pass-through has not yet been widespread.

The Bank of Canada should continue to look through the current energy price shock, keeping its policy rate steady. However, the risk of a prolonged or escalating conflict in the Middle East means that energy prices could remain elevated for some time. The longer oil and gas prices stay high, the greater the likelihood that higher production and transportation costs pass on to the prices paid by consumers. The resurgence of the trade war between Canada and the United States will also add upward inflationary pressure. If left in place, we estimate that Canadian counter-tariffs will likely add about 0.3 percentage points to headline inflation over the next 12 months. If these energy and trade shocks aren’t meaningfully resolved, the Bank may reconsider its position.

For more details about the impact of the shifting geopolitical landscape and our research on Canada’s place in a changing world, please read more here.