Canadian CPI Preview – July: The Inflation Build-up Continues. The 0.5% m/m real GDP gain in June and the 54K net job creation in July clearly show that the Canadian economy has momentum. Our economy is running at full capacity.

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Canadian CPI Preview – July: The Inflation Build-up Continues
The 0.5% m/m real GDP gain in June and the
54K net job creation in July clearly show that the
Canadian economy has momentum. Our
economy is running at full capacity. Combined
with the pass-through of Ontario’s steep minimum
wage increase on housekeeping and restaurant
prices, higher CPI inflation should not be a
surprise. Core CPI inflation measures averaged
2.0% between February and June 2018, after
running below 2% in 2017. Total CPI inflation
rose from 2.2% to 2.5% during this recent period,
the longest stretch, since 2014, for which inflation
was above the 2% Bank of Canada (BoC) target.
This on-going build-up in CPI inflation is likely not over yet. We forecast a 0.2% m/m increase in total CPI for the
month of July (consensus at +0.1% m/m) based on higher energy prices and shelter costs. The CPI report will be
released on Friday morning. Our estimate also includes the modest impact of the retaliatory countermeasures
adopted by the federal government against the U.S. steel and aluminum tariffs on a few CPI subcomponents
including housing operations and furnishing, food and recreation. If our call turns out to be right, total CPI inflation will
have accelerated further to reach a 7-year high of 2.7% in July (see chart).
An elevated 2.7% CPI inflation figure should normally benefit investors who are exposed to Canadian real return
bonds. A 2.7% inflation rate would also be close to the upper bound of the 1 to 3% range, and confirm the growing
market view that another BoC rate hike is coming this fall. This being said, we do not see the need for the BoC to
hike prematurely at its September 5th meeting. Since the BoC just raised its policy rate to 1.50% at its mid-July
meeting, another 25 basis points so soon would not really be in line with the “gradual approach” promoted by the
BoC regarding its strategy for withdrawing monetary stimulus. Furthermore, 25% auto tariffs from the U.S. remain a
threat that warrants patience. Thus, the overnight rate target is more likely to increase at the October 24th or
December 5th meeting.
Sébastien Lavoie | Chief Economist | 514 350-2931 | lavoies@vmbl.ca