Skip to main content

Bank of Canada Governor Stephen Poloz has been steadfast that the earlier inflation spike was fuelled by the temporary impact of the dollar and energy prices.The Canadian Press

Economists expect Canada's so-called "core" inflation rate to resume its climb when the latest report comes out this week, but the jury will likely remain out on whether consumer prices have yet embarked on a sustainable upward march.

Statistics Canada's consumer price index (CPI) report, to be released Friday, is expected to show that the core measure – which excludes the most volatile components of CPI, including fuels and certain food staples – increased to 1.8 per cent year over year in August, resuming its rise after easing to 1.7 per cent in July. Prior to July, core CPI had risen in six of seven months, from just 1.1 per cent last November to 1.8 per cent in June.

However, total CPI inflation, which underwent an even more rapid rise (from just 0.7 per cent last October to 2.4 per cent in June) before taking a step back in July, is expected to hold steady at 2.1 per cent in August, due largely to declines in gasoline prices.

Economists see different forces pulling Canadian inflation in opposite directions at the moment. On the one hand, temporary inflation contributors such as last year's Canadian-dollar decline and a surge in energy prices are fading from the year-over-year CPI numbers. On the other hand, an accelerating Canadian economy may have begun to fuel more lasting inflationary pressures.

"Some of the transitory factors highlighted by the Bank of Canada as culprits in inflation's rapid gains earlier in the year have abated, but better growth and weak readings from a year ago have prevented inflation from dropping off meaningfully," said CIBC economist Nick Exarhos in a report.

A rise in the core rate will be of pressing interest to the Bank of Canada, as it gauges all-important price pressures in the economy ahead of its next interest-rate decision and Monetary Policy Report (MPR) in mid-October. The central bank's policy on adjusting interest rates is explicitly tied to achieving a 2-per-cent inflation target; in practice, the central bank relies on the core inflation rate as its main guide, as it more reliably gauges the economy's underlying inflationary pressures.

The central bank was caught by surprise by this year's rapid rise in inflation, and was forced to upgrade its inflation outlook in the last MPR in July. But Bank of Canada Governor Stephen Poloz has been steadfast that the earlier inflation spike was fuelled by the temporary impact of the dollar and energy prices. He has argued that the economy still has plenty of excess output capacity, and broad-based, sustainable inflationary pressures will only come when that slack is absorbed.

On Tuesday Mr. Poloz will give a speech in Drummondville, Que. on the topic of "The role of a floating exchange rate in the Canadian economy and in the Bank's policy framework." There is speculation that this might include a discussion on "exchange rate pass-through" – the impact on consumer prices of changes in the value of the dollar. In its July MPR, the central bank estimated that last year's currency decline had added about 0.1 to 0.2 percentage points to year-over-year core inflation, and about 0.3 to 0.4 percentage points to overall inflation, at that time – but that the impact on prices would disappear by the end of this year. Economists will be looking to see if Mr. Poloz updates or elaborates on his pass-through views, given the currency's renewed declines since July.

"'Temporary' upsides to inflation may get tested further into year end. Indeed, even at a tepid monthly pace of gains, CPI could well not only hang in around the 2-per-cent target but could face upward pressure to the 2.5 to 3 per cent year-over-year pace over the closing months of 2014," said Bank of Nova Scotia economist Derek Holt.