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The Canadian Dollar leapt higher on a surprisingly strong set of inflation figures that put the market on watch for another Bank of Canada rate hike, and perhaps more significantly, a global inflationary rebound.

Markets are already anticipating an uptick in global inflationary pressures due to rising oil prices, but Canada's readings suggest the matter might be more acute than previously anticipated. "First time in my nearly 40 years in the business that I’ve seen the Treasury market respond to a Canadian CPI report," observes David Rosenberg, President of Rosenberg Research & Associates Inc.

Canadian headline CPI inflation rose 4.0% year-on-year in August said Statistics Canada, surpassing the market estimate for 3.8% and July's reading of 3.8%.

This can be explained by the rise in oil prices, but the rise in core inflation to 3.3% y/y, up from 3.2% is more relevant to the Bank of Canada.

But it is the Bank of Canada's preferred measure of inflation - the trimmed CPI - that is of particular note, having risen 3.9%, which is higher than the expected 3.5% and July's 3.6%.

"For the second month running, inflation came in hotter than economists' expectations. It would be an understatement to say that progress towards returning inflation to target has stagnated this summer," says Matthieu Arseneau, an economist at National Bank of Canada.

Andrew Grantham, economist at CIBC Bank, says the trend in price rises is inconsistent with a 2% inflation target at the Bank of Canada.

Indeed, for the third quarter as a whole, inflation is running well ahead of the 3.3% forecast from the Bank of Canada's July Monetary Policy Report.

"The Bank will therefore have some tough decisions to make at upcoming meetings. While the stall in the economy in Q2 and a modest rise in the unemployment rate are indicators that excess demand is diminishing, which should give policymakers comfort that inflation will come down in the future, they will need to balance that against evidence that current inflationary pressures remain stronger than previously anticipated," says Grantham.

The Canadian Dollar tore higher on the data, advancing two-thirds of a per cent against the Dollar to 1.3403. The Pound to Canadian Dollar extended its short-term downtrend by half of a per cent to reach 1.6617.

On a three-month annualized basis, CPI excluding food and energy and CPI excluding the eight most volatile components are rising by 3.6% and 3.2% respectively:

Above: "CPI-Trim and CPI-Median are running at a worrying pace" - NBC. Chart shows 3-month annualised change in CPI ex. F&E, ex. 8 most volatile components and average of trim and median.

Arseneau says the report presents the Bank of Canada with a complex dilemma, as inflation is accelerating while the Canadian economy is starting to bend its knees.

"Given the lag in transmission and the extremely restrictive level of monetary policy, we still believe that further rate hikes are perilous," says Arseneau.

But, "given the BoC’s hawkish bias, the likelihood of it pulling the trigger again increased substantially this morning," he warns.