| Consensus | Actual | Previous | |
|---|---|---|---|
| CPI - M/M | 0.2% | 0.4% | 0.6% |
| CPI - Y/Y | 3.8% | 4.0% | 3.3% |
| Core CPI - M/M | 0.2% | 0.5% | |
| Core CPI - Y/Y | 3.6% | 3.4% |
Highlights
Once again consumer price inflation exceeded expectations, at a monthly rate of 0.4 percent in August for a year-over-year pace of 4.0 percent, far above Econoday's consensus estimates of 0.2 percent and 3.8 percent, respectively. Excluding food and energy, inflation slowed down to 0.2 percent from 0.5 percent on the month but picked up to 3.6 percent year-over-year from 3.4 percent.
In its July Monetary Policy Report, the Bank of Canada projected an average 12-month CPI rate of 3.3 percent in the third quarter. But with July at 3.3 percent and August at 4.0 percent, September would need to come in at 2.6 percent to avoid an overshoot. To be fair, the acceleration in the headline inflation to 4.0 percent from 3.3 percent was largely due to energy which, tied especially to gasoline, rebounded 0.8 percent on the year in August after dropping 12.9 percent in July. On the month, gasoline was up 4.6 percent making it the largest contributor to the monthly CPI.
The central bank is particularly focused on core inflation. But even on that front, the picture was not encouraging in August. The 12-month inflation rate excluding gasoline held at an uncomfortable 4.1 percent. The BoC's own core measures increased in August, when the average reached 4.3 percent, up from 4.1 percent in July. All in all, today's data challenge the BoC, which might regret having paused at its September meeting following two consecutive rate hikes of 25 basis points each. In addition, Econoday's Relative Performance Index, at plus 36, is in the zone consistent with an economy performing appreciably stronger than expected. Note that when excluding the overheated inflation results, the RPI eases but only a bit to plus 25 to indicate that the real economy is also running hotter than expected.
Goods prices rose 0.6 percent on the month and 3.7 percent year-over-year in August, and services were up 0.1 percent and 4.3 percent.
Housing costs continued to push up prices in August. On a monthly basis, mortgage interest costs (up 2.7 percent) and rents (up 0.7 percent), were the second and third largest upward contributors after gasoline. On a 12-month basis, the 30.9 percent increase on mortgage interest costs made this the first upward contributor, followed by rents, which appreciated 6.5 percent from a year earlier. Overall, shelter prices rose 0.8 percent on the month and 6.0 percent year-over-year.
Among the eight main categories, food (down 0.1 percent) and recreation, education and reading (down 0.9 percent) were the only two to record lower prices on the month. Prices increased for all categories year-over-year.
On a seasonally adjusted basis, the CPI rose at a steady monthly pace of 0.6 percent in August, while the core index excluding food and energy slowed to 0.3 percent from 0.4 percent.
In its July Monetary Policy Report, the Bank of Canada projected an average 12-month CPI rate of 3.3 percent in the third quarter. But with July at 3.3 percent and August at 4.0 percent, September would need to come in at 2.6 percent to avoid an overshoot. To be fair, the acceleration in the headline inflation to 4.0 percent from 3.3 percent was largely due to energy which, tied especially to gasoline, rebounded 0.8 percent on the year in August after dropping 12.9 percent in July. On the month, gasoline was up 4.6 percent making it the largest contributor to the monthly CPI.
The central bank is particularly focused on core inflation. But even on that front, the picture was not encouraging in August. The 12-month inflation rate excluding gasoline held at an uncomfortable 4.1 percent. The BoC's own core measures increased in August, when the average reached 4.3 percent, up from 4.1 percent in July. All in all, today's data challenge the BoC, which might regret having paused at its September meeting following two consecutive rate hikes of 25 basis points each. In addition, Econoday's Relative Performance Index, at plus 36, is in the zone consistent with an economy performing appreciably stronger than expected. Note that when excluding the overheated inflation results, the RPI eases but only a bit to plus 25 to indicate that the real economy is also running hotter than expected.
Goods prices rose 0.6 percent on the month and 3.7 percent year-over-year in August, and services were up 0.1 percent and 4.3 percent.
Housing costs continued to push up prices in August. On a monthly basis, mortgage interest costs (up 2.7 percent) and rents (up 0.7 percent), were the second and third largest upward contributors after gasoline. On a 12-month basis, the 30.9 percent increase on mortgage interest costs made this the first upward contributor, followed by rents, which appreciated 6.5 percent from a year earlier. Overall, shelter prices rose 0.8 percent on the month and 6.0 percent year-over-year.
Among the eight main categories, food (down 0.1 percent) and recreation, education and reading (down 0.9 percent) were the only two to record lower prices on the month. Prices increased for all categories year-over-year.
On a seasonally adjusted basis, the CPI rose at a steady monthly pace of 0.6 percent in August, while the core index excluding food and energy slowed to 0.3 percent from 0.4 percent.
Market Consensus Before Announcement
After July's higher-than-expected rise from 2.8 to 3.3 percent rate, consumer prices in August are expected to accelerate further to 3.8 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.
