Canada’s producer price index went up by 0.5% in August, exceeding the expected increase of 0.2%. Previously, it had risen by 0.7%. Meanwhile, US producer prices increased by 4.0% year-on-year, up from 2.6% before. The raw materials price index fell by 0.6% from the previous month but rose by 3.2% over the year. When excluding crude energy, the raw materials price index jumped by 15.5% in the last year.

Market Reaction to Oil Prices

Falling oil prices have helped stabilize producer prices, but recent rises caught the market off guard. Key contributors to this increase included chemicals, meat, fish and dairy, motor vehicles, and non-ferrous metals like gold and silver. Energy costs dampened their effect. Meat prices, especially beef, rose sharply by 5.2% from the previous month. Even though crude oil prices dropped by 16.2% year-on-year, their impact on the index remains significant, as low oil prices may not last. If we disregard crude oil, we might uncover more inflation issues, similar to trends seen in 2021-22. This highlights how oil prices affect broader economic indicators. The latest producer price data from Canada is unexpectedly high, indicating that inflation pressures are not easing as quickly as many hoped. We need to reconsider the idea that the Bank of Canada might lower rates soon.

Implications for the Canadian Economy

The main point is that decreasing oil prices have been hiding a larger problem. While WTI crude is significantly down from last year, around $75 per barrel, the raw materials index (without crude energy) has surged by 15.5%. This pattern resembles the inflation spike of 2021-2022, suggesting widespread price pressures that the market may be underestimating. For those trading interest rates, this signals a shift towards a more hawkish Bank of Canada. The market had anticipated steady rates through early 2026, but may now need to rethink this outlook. Consider preparing for higher yields by selling Canadian 10-year bond futures (CGB) or using options to bet on a possible rate hike before the year ends. This situation also affects the Canadian dollar. A central bank that needs to act more aggressively typically strengthens its currency. This makes a compelling case for buying the Canadian dollar against the US dollar, possibly through call options or by selling USD/CAD futures. The report highlights strength in meat and precious metals like gold and silver, indicating specific commodity opportunities. We should look into long positions in gold and silver futures as a direct way to hedge against persistent inflation, which is now evident in official data. Finally, the gap between overall inflation and the underlying details adds uncertainty. This environment could lead to higher volatility in Canadian markets. Buying options that benefit from bigger price movements, such as straddles on the S&P/TSX 60 index, might be a smart strategy in the coming weeks as the market processes this new information. Create your live VT Markets account and start trading now.

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