VIDEO Canada’s annual rate of inflation in August may have remained at three per cent, but some economists say the odds of a December rate hike by the Bank of Canada have increased due to surging global oil prices .
The price of oil has risen 15 per cent in September to top US$100 a barrel after spending the summer months between US$80 and US$85.
Gas pump prices rose 22.8 per cent in August from a year ago, compared with 25.7 per cent in July, Statistics Canada said, keeping inflation at the top end of the Bank of Canada’s target zone of one per cent to three per cent.
Here’s what economists had to say about inflation and what’s next for the Bank of Canada and interest rates.
No comfort: Desjardins “While inflationary pressures looked relatively contained in August, Bank of Canada officials won’t take much comfort with oil prices above $100 per barrel,” Royce Mendes, managing director and head of macro strategy at Desjardins Group , said in a note on Monday.
He said moderating gas prices “temporarily” contained inflation in August at three per cent, matching economists’ expectations.
Excluding gas and food, the consumer price index (CPI) rose to 2.1 per cent in August from 1.9 per cent in July. The Bank of Canada’s preferred measures of core inflation, CPI trim and median, came in at a 12-month rate of two per cent.
Cooler core inflation will give the Bank of Canada some breathing space that others such as the European Central Bank, which hiked rates by 25 basis points last week after increasing them in June, don’t have.
But Mendes said if oil prices don’t start falling soon, policymakers won’t have any choice but to hike because rising prices for oil and gasoline will show up in other areas of the economy over the next few months.
“For monetary policy, oil is now in the driver’s seat,” he said.
‘Odds rise’: RSM Canada “The odds of a hike in December rose slightly,” Tu Nguyen, an economist at RSM Canada LLP, said in a note, adding that the longer the war in Iran lasts, the more likely inflation will break out beyond the gas pumps.
“The Bank of Canada cannot control energy prices,” he said.
RSM expects annual inflation to accelerate past three per cent in September, though core measures will be held in check by tamer home prices and food.
Food inflation for August undershot the overall CPI for the first time since July 2024.
RSM is calling for the Bank of Canada to hold rates at 2.25 per cent for the remainder of 2026 before hiking in the first quarter of 2027.
Labour slack persists: Normura “Underlying price pressures remained contained,” Ruchir Sharma, an economist at Normura Securities International, said in a note.
The Bank of Canada’s preferred core inflation measures of trim and median averaged 1.95 per cent year over year in August, the same as July, while the number of categories in the CPI basket that rose to or higher than three per cent remained “benign,” he said.
Shelter inflation also rose, but stayed under two per cent, while goods inflation posed no threat, he said, citing the cooling food CPI.
“With underlying price pressures contained and labour market slack persisting, we continue to expect the Bank of Canada to remain on hold through 2026,” Sharma said.
Will follow other central banks: Capital Economics “It now looks increasingly likely the Bank of Canada will follow other major central banks in hiking rates this year,” Bradley Saunders, North America economist at Capital Economics Ltd. , said in a note, citing a second straight monthly increase in core inflation along with surging oil prices.
Policymakers’ preferred inflation measures of CPI trim and median have risen to 2.7 per cent annualized over the past two months, he said, due to rising shelter prices, mortgage costs, airfares and travel tours.
“With the Bank of Canada sounding more hawkish at its recent meeting, it is looking increasingly likely that a rate hike is enacted before the year is out,” he said.
‘Behind the curve’: Bank of Nova Scotia “The Bank of Canada is behind the curve in fighting inflation. Again,” Derek Holt, vice-president and head of capital markets economics at Bank of Nova Scotia , said in a note.
He said several measures of core inflation already sit well above policymakers’ two per cent inflation target on a month-over-month seasonally adjusted annual rate, including trimmed mean CPI at 3.9 per cent, weighted median at 2.7 per cent and CPI excluding food and energy at 2.8 per cent.
Holt said those numbers make the case for an interest rate increase at the central bank’s meeting on Oct. 28.
“You shouldn’t be hanging around the low end of neutral with a real policy rate around zero if not negative when all of your inflation gauges are on or above target,” he said.
The Bank of Canada’s neutral range, where the economy is neither held back nor stimulated, is 2.25 per cent to 3.25 per cent.
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