The Bank of Canada has stated that the recent fluctuations in headline inflation are within the expected range, but the primary trend indicated by key metrics falls short of the 2% inflation target.
The latest inflation data for August pushed the headline rate up to 4.0%, surpassing the predictions of most economists, compared to 3.3% in July.
Deputy Governor of the Bank of Canada, Sharon Kozicki, observed that the erratic fluctuations seen over the past few months are not uncommon. She also highlighted that this is one of the reasons the central bank is giving more attention to core inflation measures, which exclude the more volatile price movements.
One such benchmark, the CPI excluding mortgage interest rate changes, has recently ranged between 3.5% and 4%.
Kozicki emphasized that core inflation continues to significantly exceed the 2% consumer price inflation target.
In light of the August inflation data, the probability of an interest rate increase following the upcoming policy meeting on October 25 has risen from 23% to 42%. Canada has experienced inflation above the central bank’s 2% target for over two years now.
Bank of Canada Governor, Tiff Macklem, stated on September 7 that even with ten previous headline rate hikes totaling 475 basis points since last March, interest rates might still not be at a level sufficient to bring inflation back in line with the target.
On September 6, the Bank of Canada decided to maintain its key rate at 5%, acknowledging a period of slower economic growth but leaving the door open for a potential hike if inflationary pressures continued to mount.
Kozicki also pointed out that although there is evidence that prior rate hikes are tempering demand, inflation remains elevated, necessitating the maintenance of high real interest rates.
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