No BoC surprise from August CPI
Canadian inflation held steady in August, with headline CPI at 3.0% YoY, matching July, consensus, and our expectations.
Crucially, the Bank of Canada's preferred core measures were unmoved, with CPI-trim at 1.9% and CPI-median at 2.0%. With no change to report, the data offers little impetus for the Governing Council to reassess its current policy stance. We continue to expect the policy rate will remain at 2.25% into 2027.
Looking more closely at the report for any takeaways of note, gasoline slipped 0.9% on the month, taking the annual rate down to 22.8% from 25.7% as pump prices stabilised through August.
The World Cup unwind we flagged in our preview also arrived, with travel tours down 2.9% and airfares 3.3% lower on the month, even as rent costs accelerated 0.8% MoM, lifting CPI ex-gasoline to 2.4%, from the 2.2% Governor Macklem cited on September 2nd. These dynamics look idiosyncratic to us, though we are inclined to place some weight on annual grocery inflation, which slowed to 2.8%, undercutting headline for the first time since July 2024. In short, nothing here resembles the kind of broad-based spillover that would justify tighter policy.
As we have observed ad nauseum in recent weeks, a brief outbreak of hawkishness at the BoC’s September 2nd meeting looks increasingly at odds with fundamentals.
Macklem called 3% inflation too high and warned that multiple hikes could follow if energy costs bled into wider prices, while conceding there was little evidence of that yet. That remains the case in the August CPI figures. Set alongside a jobs report that showed employment down 41.7k, with wage growth slowing to 2.0%, and a trade backdrop that has deteriorated sharply, we see no case for an October move.
The obvious caveat is that August's gasoline reprieve predates the latest escalation in the Middle East. US strikes on Iranian tankers and Tehran's retaliation against Hormuz shipping have taken Brent from the mid-$80s a month ago to just shy of $110 today, while Thursday's drone attack on Saudi Arabia's East-West pipeline, the kingdom's main route around Hormuz, looks set to keep it largely offline for several weeks. Headline inflation is therefore likely to climb again in September, with the October 19th release date falling ahead of the BoC’s October 28th decision.
Still, the Bank has been explicit that it is looking through direct energy effects, and the second-round pressures it is watching for remain elusive.
We see no reason to expect to see anything different in September based on the totality of recent publications. In turn, that leaves market policy rate expectations scanning as too aggressive, pricing a 70% chance of an October hike and around 36bp of tightening by year-end, close to unmoved post-release. We expect pricing to drift lower as today’s details are digested, weighing on the loonie at the margin, though for now, USDCAD is trading little changed.