| Consensus | Actual | Previous | |
|---|---|---|---|
| CPI - M/M | 0.3% | 0.6% | 0.1% |
| CPI - Y/Y | 2.9% | 3.3% | 2.8% |
| Core CPI - M/M | 0.5% | 0.0% | |
| Core CPI - Y/Y | 3.4% | 3.5% |
Highlights
Consumer price inflation is hotter than expected, at an annual 3.3 percent in July which is sharply higher than June's 2.8 percent and compared to expectations for 2.9 percent. This puts the Bank of Canada in a bind, perhaps extending the need for further hikes at the bank's upcoming meeting early next month.
Base effects tied to high gasoline prices this time last year are skewing the year-over-year comparison higher, yet the monthly rise of 0.6 percent, which is double expectations, points to more immediate pressure. Nevertheless, when excluding gasoline, the annual rate, instead of spiking, is up only 1 tenth at 4.1 percent. And when excluding energy as a whole, including a giant 127.8 percent surge in Alberta electricity costs on cooling demand, the CPI actually decelerated 2 tenths to 4.4 percent.
But fundamentally, high interest rates are at play in Canadian inflation. The mortgage interest cost index is up 30.6 percent on the year which is another record and gasoline and electricity and energy aside remains the largest contributor to headline inflation. Grocery prices are another inflationary hot point, up 8.5 percent on the year though, in a limited offset, down from June's 9.1 percent.
When excluding both food and energy, prices rose 3.4 percent on the year versus June's 3.5 percent with the monthly showing at 0.5 percent versus no change. The report notes that travel tours were the largest factor behind the monthly gain (July being a peak travel month).
The BoC had stepped back in the spring with two pauses but since have raised rates an incremental 25 basis points at two successive meetings. Another such hike for a third successive meeting would be little surprise. Yet on the whole, Canadian data are coming up short of expectations, at minus 22 on Econoday's Consensus Divergence Index and even more so when excluding the overheated inflation data, at minus 33 to indicate palpable economic underperformance relative to expectations.
Base effects tied to high gasoline prices this time last year are skewing the year-over-year comparison higher, yet the monthly rise of 0.6 percent, which is double expectations, points to more immediate pressure. Nevertheless, when excluding gasoline, the annual rate, instead of spiking, is up only 1 tenth at 4.1 percent. And when excluding energy as a whole, including a giant 127.8 percent surge in Alberta electricity costs on cooling demand, the CPI actually decelerated 2 tenths to 4.4 percent.
But fundamentally, high interest rates are at play in Canadian inflation. The mortgage interest cost index is up 30.6 percent on the year which is another record and gasoline and electricity and energy aside remains the largest contributor to headline inflation. Grocery prices are another inflationary hot point, up 8.5 percent on the year though, in a limited offset, down from June's 9.1 percent.
When excluding both food and energy, prices rose 3.4 percent on the year versus June's 3.5 percent with the monthly showing at 0.5 percent versus no change. The report notes that travel tours were the largest factor behind the monthly gain (July being a peak travel month).
The BoC had stepped back in the spring with two pauses but since have raised rates an incremental 25 basis points at two successive meetings. Another such hike for a third successive meeting would be little surprise. Yet on the whole, Canadian data are coming up short of expectations, at minus 22 on Econoday's Consensus Divergence Index and even more so when excluding the overheated inflation data, at minus 33 to indicate palpable economic underperformance relative to expectations.
Market Consensus Before Announcement
After June's lower-than-expected 2.8 percent rate, consumer prices in July are expected to edge higher to 2.9 percent. The monthly rate is seen rising to 0.3 percent from June's 0.1 percent.
Definition
The Consumer Price Index (CPI) is a measure of the average price level of a fixed basket of goods and services purchased by consumers. Monthly and annual changes in the CPI provide widely used measures of inflation. The policy target measure for the Bank of Canada (BoC), the annual CPI rate can be distorted by swings in the more volatile subsectors so the central bank also monitors an adjusted measure of the CPI that excludes a range of volatile categories in order to get a better handle on underlying trends.
Description
The consumer price index is the most widely followed indicator of inflation. An investor who understands how inflation influences the markets will benefit over those investors that do not understand the impact. In countries such as Canada, where monetary policy decisions rest on the central bank's inflation target, the rate of inflation directly affects all interest rates charged to business and the consumer.
Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
As the most important indicator of inflation the CPI is closely followed by the Bank of Canada. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. It uses the CPI and three measures of the underlying rate as the prime inflation indicators. Markets also look at core rate which excludes food and energy.
Inflation is an increase in the overall prices of goods and services. The relationship between inflation and interest rates is the key to understanding how indicators such as the CPI influence the markets - and your investments.
Inflation (along with various risks) basically explains how interest rates are set on everything from your mortgage and auto loans to Treasury bills, notes and bonds. As the rate of inflation changes and as expectations on inflation change, the markets adjust interest rates. The effect ripples across stocks, bonds, commodities, and your portfolio, often in a dramatic fashion.
By tracking inflation, whether high or low, rising or falling, investors can anticipate how different types of investments will perform. Over the long run, the bond market will rally (fall) when increases in the CPI are small (large). The equity market rallies with the bond market because low inflation promises low interest rates and is good for profits.
As the most important indicator of inflation the CPI is closely followed by the Bank of Canada. The Bank of Canada has an inflation target range of 1 percent to 3 percent but focuses on the 2 percent midpoint. It uses the CPI and three measures of the underlying rate as the prime inflation indicators. Markets also look at core rate which excludes food and energy.
