Inflation Expectations
Economists are predicting a rise in pump prices in September, which is expected to push inflation higher ahead of the Bank of Canada’s next interest rate decision at the end of October. The September inflation figures are set to be reported by Statistics Canada, and a Reuters poll of economists predicts that annual inflation will rise to 2.2% in September, up from 1.9% in August.
Factors Contributing to Inflation
One of the main factors contributing to the expected rise in inflation is the increase in gasoline prices. Although prices were only slightly higher month-to-month in September, they fell sharply in the same period last year, which will push the annual price comparison higher due to the base-year effect. Additionally, the removal of counter-tariffs on the United States at the start of September may also have an impact on inflation, although the degree of price relief will vary depending on how firms treat ongoing trade uncertainty.
Impact of Tariffs on Inflation
The retaliatory tariffs imposed by Canada on the United States were driving up the prices of clothing and footwear, according to Statistics Canada’s June inflation report. Some economists have also pointed to food inflation as being affected by the counter-tariffs, with higher prices more likely to be passed through quickly on perishable goods like groceries. However, the relatively weak Canadian dollar earlier this year, which was putting upward pressure on food inflation, is expected to fade in the coming months as the Loonie has strengthened.
Bank of Canada’s Interest Rate Decision
The inflation report will be the last major economic release before the Bank of Canada’s next interest rate decision on October 29. The central bank cut its policy rate by a quarter point to 2.5% in September, citing a shift in risks away from higher prices and toward a weakening economy. However, the recent labour market report showed a surprising gain of 60,000 jobs, which may impact the Bank of Canada’s decision. The bank will also release its own quarterly surveys of businesses and consumers, which will provide an update on how Canadians and employers are feeling about trade uncertainty.
Economic Outlook
Economists are expecting a rebound in sentiment compared to the second quarter of the year when tariff disruptions were severe. However, ongoing uncertainty is expected to weigh on investment intentions and hiring intentions. The Bank of Canada will be looking at two key factors in the week ahead: the business outlook survey and its preferred measures of core inflation. If the survey shows weakness in hiring intentions has spread to industries outside trade-affected sectors, it may suggest there is more room to keep cutting the policy rate. However, if core inflation shows signs of accelerating, it could hold the central bank back from any more easing.
Conclusion
In conclusion, the expected rise in inflation and the Bank of Canada’s next interest rate decision are closely tied to the current economic outlook. The inflation report and the business outlook survey will be crucial in determining the bank’s decision, and economists are predicting a possible quarter-point cut. However, the uncertain economic environment and the impact of trade tariffs make it difficult to predict the bank’s next move. As the Bank of Canada navigates these complex factors, it will be important to consider the breadth of inflation and the underlying price pressures to make an informed decision about interest rates.
