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Headline CPI rose to 4.1% YoY in August, the fastest pace since March 2003, while on a sequential basis, inflation rose only 0.2%, down from a 0.6% MoM increase in July. The main drivers continue to be reopening and base effects, with durable goods (+5.7%), passenger vehicles (+7.2%) and services pricing (+2.7%) contributing heavily to the rise in inflation on an annual basis.

The loonie took the CPI data largely within its stride as it briefly dipped below the 1.2670 handle before retracing somewhat to trade at pre-CPI levels.

The limited market reaction is largely due to the fact that central banks continue to be unmoved by rising prices as they deem them transitory. However, with the BoC seeing inflation sit at 3.5% YoY in Q4, today’s data suggests that the overshoot above 4% was a lot more aggressive than previously thought.

In this light, the Bank of Canada is unlikely to deviate from our projected path of a further C$1bn taper in October, while the loonie turns its focus away from economic data and towards the results of Monday’s federal election. With the Conservative party targeting the Liberal’s previous regime and the impact it has had on price growth, today’s inflation data may be more deterministic for the election outcome than current FX market price action.


Headline CPI rises to its highest point since 2002 just before next week’s election


Author: Simon Harvey, FX Market Analyst



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