MNI: Canada Core CPI Holds Around 3%, Headline Climbs To 1.9%

Canadian core inflation measures held around 3% in August while headline price gains quickened on a base effect for gasoline, a report coming the day before investors predict the central bank will cut interest rates because of bigger concerns around job market weakness.

The "trim" core measure of inflation preferred by the Bank of Canada slowed a tenth to 3.0% in August and the "median" index remained at 3.1% in Statistics Canada's report Tuesday from Ottawa. Headline inflation advanced 1.9% following July's 1.7%, matching economist forecasts. Gasoline prices fell 13% in August from a year ago, while in July the decline was 16%.

Governor Tiff Macklem says he's paying close attention to trend inflation and his preferred measures may be overstating underlying inflation that could be closer to 2.5%. Other measures in StatsCan's report are in line with that view. Excluding food and energy, prices advanced 2.4%, and that was also the inflation rate excluding just gasoline. Most economists predict that even with elevated core inflation the Bank will lower its 2.75% policy interest rate a quarter point Wednesday following reports showing damage from the U.S. trade war such as unemployment at the highest in almost a decade excluding the pandemic and a record year-to-date trade deficit.

Some items keeping core inflation elevated have lingered since before the trade tensions. Food prices are up 3.4% from a year earlier and shelter costs by 2.6%. The Bank in July projected a core inflation rate of 3.1% in the third and fourth quarters of this year, though officials also said they could cut borrowing costs if the economy weakens and inflation remains contained. 

One sign investors may focus on to justify a rate cut is CPI fell 0.1% on a monthly basis, while economists predicted no change. 

Trade war or not, cutting borrowing costs again when it's unclear why core prices have been sticky could put the Bank's reputation at risk again if tariffs create another burst of inflation as was seen after the Covid rebound. The Bank sets rates to keep inflation in the middle of a 1% to 3% target band and unlike the Federal Reserve has no labor market target.