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Chances of Bank of Canada interest-rate hike grow as inflation reaches seven-year high

Soaring airfares and high gas costs drove Canada’s inflation rate to a seven-year high in July, raising the chances of another Bank of Canada interest-rate hike in October.

The Consumer Price Index – a broad measure of the cost of living – hit 3 per cent in July, the highest since 2011 and above the central bank’s target of 2 per cent for the sixth month in a row.

The higher rate of inflation was fuelled by a 25.4-per-cent surge in gas prices and a 16.4-per-cent increase in air-transportation costs.

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Other year-over-year gains included a 3.2-per-cent rise in the price of services and a 2.2-per-cent boost in telephone service costs. Statistics Canada said all eight of the major components it measures increased in July.

Sal Guatieri, senior economist and director for BMO Capital Markets, said that while the overall number is quite high, the Bank of Canada’s core measure of inflation – which strips out more volatile items such as energy – remains steady at 2 per cent.

“We’re not seeing a sustained upward drift in core inflation, so we’re not too worried about the inflation picture,” said Mr. Guatieri, who pointed out that those core measures provide a better picture of Canada’s economic situation.

CIBC Senior Economist Andrew Grantham and other economists believe inflation will cool in coming months, but Mr. Grantham said the current trade dispute between Canada and the United States could change that situation.

The current effect of tariffs on the CPI score is quite low. Statistics Canada estimated that Canada’s retaliatory tariffs on various U.S goods caused a 0.07-per-cent increase to the overall CPI.

“We were focused on the impact of those tariffs, particularly on food prices coming in, but we didn’t quite see the extent of it that we expected,” Mr. Grantham said. “But that’s something to look for going forward. It’s not necessarily that we’re not going to see it, it just might happen next month instead.”

Craig Wright, chief economist at RBC, said that the high CPI number initially led to some expectations of a Bank of Canada interest rate hike as early as September, but October is seen as more likely.

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Mr. Guatieri said a hike in October will probably be the last in 2018 but several more are possible in 2019, eventually bringing the rate to a full percentage point above its current level of 1.5 per cent.

“The economy is growing at least at its potential, which suggests to the Bank of Canada that we no longer need very low interest rates,” Mr. Guatieri said.

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