Economists expect that inflation has returned to accelerating to around four percent last month, reflecting the previous progress made as rising gasoline prices pushed inflation higher.

The Consumer Price Index report from Statistics Canada for August is expected to show an increase in the annual inflation rate for the second consecutive month, scheduled to be released on Tuesday.

Inflation in Canada fell to 2.8 percent in June, entering the Bank of Canada's target range of 1 to 3 percent for the first time since March 2021. However, the celebrations for reaching this benchmark were short-lived as inflation rose the following month.

Royce Mendes, Managing Director and Head of Macro Strategy at Desjardins, stated that he expects the headline inflation rate to reach four percent for August, up from 3.3 percent in July.

Mendes said, "We expect the Consumer Price Index data to reveal that Canadians' wallets have been impacted by rising prices, once again, largely due to gasoline prices."

Oil prices steadily increased throughout the summer, surpassing $90 a barrel this week. In comparison, June prices were closer to $70 a barrel.

At the same time, TD expects inflation to rise to 3.8 percent. Executive Director of Economics James Orlando noted that another factor likely contributing to inflation's rise in August is the fact that inflation began to decrease a year ago.

He stated, "We saw a decline in inflation last year, which means there will be some base effects that will lead to a higher inflation reading next week."

The Bank of Canada has kept the door open for further rate hikes partly because it expects reducing inflation to 2 percent will take some time. However, economists say the recent recession in the economy is likely to convince the central bank to stay on the sidelines.

Earlier this month, the Bank of Canada chose to keep the key interest rate steady at five percent after raising rates at its previous two meetings. The decision came after recently released data showed a contraction in the economy in the second quarter.

Orlando also said that the fact that the economy is slowing provides justification for the Bank of Canada to maintain interest rates as they are, even if inflation is rising in the short term.

Orlando added, "All the things that concern you could lead to greater domestic inflation in Canada... a very rapid slowdown in the Canadian economy has begun to show."

Although progress in reducing inflation shows signs of stalling, economists and the Bank of Canada expect that the tighter economic conditions resulting from rising interest rates will ultimately lead to smaller price increases.