Canada's Inflation Rate Hike Odds Rise as Oil Prices Soar

Canada's annual inflation rate in August remained at three percent, but some economists say the odds of a December interest rate hike by the Bank of Canada have increased due to surging global oil prices.

The price of oil has risen 15% in September to top $100 per barrel after spending the summer months between $80 and $85. Gas pump prices rose 22.8% in August from a year ago, compared with 25.7% in July, keeping inflation at the top end of the Bank of Canada's target zone of one percent to three percent.

Royce Mendes, managing director and head of macro strategy at Desjardins Group, said that while moderating gas prices 'temporarily' contained inflation in August at three percent, matching economists' expectations, excluding gas and food, the consumer price index (CPI) rose to 2.1% in August from 1.9% in July.

Cooler core inflation will give the Bank of Canada some breathing space that others such as the European Central Bank don't have. Mendes said if oil prices don't start falling soon, policymakers won't have any choice but to hike because rising prices for oil and gasoline will show up in other areas of the economy over the next few months.

'For monetary policy, oil is now in the driver's seat,' he said.