U.S. inflation tops forecasts, cementing odds of big fed hike
U.S. consumer prices resurged in August, putting pressure on the U.S. Federal Reserve to unleash another interest rate hike at its meeting next week.
U.S. Labor Department reported the consumer price index gained 0.1 per cent from a month ago, after data was unchanged in July.
“Frankly, it's an ugly number,” said Benjamin Tal, deputy chief economist at CIBC, in a phone interview Tuesday.
“We knew that gasoline prices would go down, but the surprise is that [they] are broadly based increases.”
Beata Caranci, chief economist and senior vice president at TD Bank Group, said two months ago U.S. inflation data was giving “a little bit of hope that the core metrics were going to cool down and today's report really threw that notion into reverse.”
“It's not going to be perceived well, it shows how sticky inflation is. It certainly argues that central banks are just going to have to move more, perhaps, than they were thinking, when they were initially expecting on those policy rates,” Caranci said in a phone interview Tuesday.
IMPACT ON BOC
Royce Mendes, managing director and head of macro strategy at Desjardins Group, said there are two things the Bank of Canada will have to acknowledge after this report.
“First, central bankers can’t get complacent after seeing small improvements in price growth. And, second, strong inflationary pressures are likely still being imported from the U.S.,” Mendes said over email Tuesday.
Craig Alexander, chief economist and executive advisor at Deloitte, said he was hoping there was some relief with U.S. core inflation, but with prices trending higher south of the border it could spell trouble for Canada.
“The fact that we're still seeing underlying inflationary pressures building in the United States it’s going to be concerning if the Bank of Canada thinks that something similar is happening in Canada as well,” Alexander said in a phone interview Tuesday.
In July, Statistics Canada reported the consumer price index rose 7.6 per cent from a year ago, which was slightly lower from the 8.1 per cent gain in June.
Statistics Canada is expected to release the latest read on inflation next week, on September 20.
'MANAGEABLE' GAP IN RATES
Despite U.S. inflation concerns, Tal said the Bank of Canada will only have to react if the U.S. Federal Reserve raises rates by more than 100 basis points at its next meeting, since there can’t be a huge gap between Canadian and U.S. rates.
“At this point, the gap is manageable and therefore the Bank of Canada will not lose sleep over it,” Tal said over the phone.
“We have to remember that in the previous cycle, the Bank of Canada ended hiking at 175 bps and the U.S. Fed ended at around 220 bps so it's not unique to see the Fed moving more than the Bank of Canada. Therefore, I think that the Bank of Canada is not really rethinking strategy at this point.”
FUTURE RATE HIKES
Last week, the Bank of Canada hiked its benchmark overnight rate by 75 basis points to 3.25 per cent.
In the central bank’s press release, it said, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”
Caranci said she expects the Bank of Canada will have a policy rate of at least four per cent by the end of this year. But, she said it’s important to remember “this isn’t the worst situation we’ve been in.”
“We’ve went through a pandemic, we went through a global financial crisis, we're in an environment of high inflation because the job market is strong and consumer demand is strong, so we've had far worse situations,” Caranci said.
“However, they (the Bank of Canada) are going to have to do corrective behaviour. Next year is going to definitely be a soft pocket; it's just a matter of how soft. But I would say with the last two recession cycles, we've been through worse.”