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Canadian inflation jumps; October rate hike bets rise

Kitco News

OTTAWA, Sept 19 (Reuters) - Canada's annual inflation rate in August jumped to 4.0% from 3.3% in July on higher gasoline prices, data showed on Tuesday, a sign that the central bank may be forced to raise interest rates yet again after 10 hikes since March of last year.

Analysts polled by Reuters had forecast inflation would hit 3.8%. The consumer price index rose 0.4% on a month-over-month basis in August, Statistics Canada said, compared with a predicted 0.3% gain. Two of the three core inflation measures also rose.

The annual rate last month, the highest since the 4.4% reported in April, is well above the Bank of Canada's 2% target. The main driver was a 0.8% year-on-year increase in gasoline prices, which had dropped 12.9% in the 12 months to July.

"We have got to avoid overly strident opinions that the bank is done with rate hikes and be more circumspect, follow the evidence," said Derek Holt, vice president of capital markets economics at Scotiabank. "I still think we need to leave the door very much open to further rate hikes, plural."

Holt highlighted gains in two of the Bank of Canada's three core measures of underlying inflation - CPI-median edged up to 4.1% from 3.9% in July while CPI-trim rose to 3.9% from 3.6%.

Money markets raised bets for a rate hike in October after the data, seeing a 36% chance of an increase after the price figures compared with 23% before.

The Canadian dollar was trading 0.6% higher at 1.34 to the greenback, or 74.63 U.S. cents, after touching its strongest level since Aug. 10 at 1.3383.

However, another inflation report and a bevy of other data are due out before the Canadian central bank next meets to set the key overnight rate on Oct. 25.

"We still think the chance of a rate hike is low as we feel that they have stopped with the cycle," said Jimmy Jean, chief economist at Desjardins Group. "The economy is slowing and the unemployment numbers seem to be inching high, so those are important thing that matters."

Shelter prices in August increased 6.0% after a 5.1% advance in July, pushed up in part by rising rents and higher interest rates.

Bank of Canada Governor Tiff Macklem, noting an increase on oil prices, predicted on Sept. 7 that "headline inflation is going to go up in the near term before it eases".

The central bank held its key overnight interest rate at 5% on Sept. 6, noting the economy had entered a period of weaker growth, but said it could raise borrowing costs again should inflationary pressures persist.

Reporting by David Ljunggren and Steve Scherer, additional reporting by Dale Smith, Fergal Smith and Divya Rajogopal; editing by Paul Simao

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