The Canadian economy is cooling but inflation accelerated as the base effect from gasoline faded. Statistics Canada (StatCan) data shows CPI accelerated in August, with core measures still running hot and shelter costs returning to breakneck growth. That puts the Bank of Canada (BoC) in a tricky situation at the upcoming rate announcement, as it risks pouring gas on the inflation fire that’s already burning too hot.
Canadian Headline Inflation Accelerates As The Drag From Gas Eases
Canadian headline inflation accelerated last month, though it remains relatively low. CPI accelerated to 1.9% y/y in August, from the 1.7% reported in July. Cheaper gasoline prices continue to suppress headline data, with CPI rising to 2.4% y/y when excluded.
The suppression of gasoline is expected to fade over the coming months. Gas prices climbed 1.4% in August, leaving prices 12.7% lower than last year vs the 16.1% drop reported in July. As the base effect suppression fades, headline inflation is likely to rise even without much acceleration in other segments.
Bank of Canada’s Core Inflation Measures Remain Critically High
Accelerating headline data is further complicated by lofty core inflation measures. The Bank of Canada’s (BoC) preferred measures provide a more stable picture by stripping out the most volatile movements. CPI-Common’s annual growth came in at 2.5% in August, significantly higher than the BoC’s 2% target. The other two core inflation measures are pushing the central bank’s 3% upper bound of tolerance, with CPI-Median at 3.1% and CPI-Trim at 3%.
The persistent and sticky core inflation readings suggest underlying price pressure remains elevated despite headline data appearing relatively tame.
Canadian Shelter Costs Still Soaring, BoC Cuts Become Difficult
Source: StatCan.
StatCan specifically flagged one persistent issue—shelter. The largest component of the CPI basket is Shelter (+2.6%), but breaking it down both rent (+4.5% y/y) and mortgage interest (+4.2%) came in well above the BoC’s 2% target, even pushing above the 1—3% tolerance range.
Headline CPI may be near the BoC’s target, but cheap gas is having a hard time masking rising pressures. Core inflation is stuck at levels the BoC considers problematic, and with services and shelter still surging, rate cuts will be hard to justify at tomorrow’s meeting.
They’re going to cut anyway, the implied market odds are almost 100%.
Remember when Scotiabank called the recent modeling changes “fakeflation,” and said the changes would chronically under report going forward?
… they can’t even control it when they implement their own modeling bias.
What happened to gasoline prices last month is interesting. The Daily reported: “On a yearly basis, prices for gasoline fell 12.7% in August, compared with a 16.1% decline in July. The smaller year-over-year decrease was partially a result of a base-year effect. In August 2024, prices declined 2.6% month over month, as concerns about slower economic growth began to emerge. In August 2025, prices rose 1.4% on a monthly basis due in part to higher refining margins, offsetting lower crude oil costs.” Of course, we are talking here not about a base year effect, as StatCan states, but an exit effect, as the 2.6% August 2024 monthly change exited the 12-month change. However, in this case that August 2024 monthly change was diminished due to the big 13.9% drop in gasoline prices from August 2024 to July 2025, so the exit effect was only 2.2%. Similarly, the entry effect of the August 2025 1.4% monthly increase in gasoline prices was reduced to 1.2% by the same 11-month percentage change.
The same thing happened with clothing and footwear. The Daily reported: “In August, prices for clothing and footwear rose 1.7% year over year compared with a 0.8% increase in July. The increase in August was mainly the result of a base-year effect as prices declined by 0.6% in August 2024. On a monthly basis, prices for clothing and footwear rose 0.3% in August” Once again, this was mislabeled a “base year effect” by StatCan. This time there was a modest 1.4% inflation rate from August 2024 to July 2025 so the change in the annual inflation rate could be correctly deduced from the change in the exiting and entering monthly inflation rates.
Year over year reading don’t make too much sense. Inflation is very low month over month while the unemployment rate is getting higher, which gives BOC justification to cut rates.
LMAO at how wrong the last sentence is in this article. Didn’t seem hard at all to justify the Sept 17th cut.
Straight up moronic. The only reason we have even a smidgen of clout in international currencies is because we defend it when needed. Just reaffirms my belief to do business in another country.