The Canadian inflation rate is slowing but price levels remain elevated.
The Consumer Price Index (CPI) rose 1.6% on a year-over-year basis in September, down from a 2.0% gain in August. This was the smallest yearly increase since February 2021 (+1.1%). The main contributor to headline deceleration was lower year-over-year prices for gasoline in September (-10.7%) compared with August (-5.1%). The all-items CPI excluding gasoline rose 2.2% in September, matching the increase in August for this measure, reported Statistics Canada on Tuesday.
“Although the rate at which prices are increasing has slowed, price levels remain elevated. Compared with September 2021, the CPI rose 12.7% in September. Canadians continue to feel the impact of higher price levels for day-to-day basics such as rent (+21.0%) and food purchased from stores (+20.7%), which increased during that same 3-year period,” said the federal agency.
“On a monthly basis, the CPI fell 0.4% in September, after a 0.2% decline in August. Both the monthly and yearly movement in September were led by lower prices for gasoline. On a seasonally adjusted monthly basis, the CPI was unchanged at 0.0% in September.”
“With headline inflation now decisively below the Bank of Canada’s (BoC’s) target and core inflation looking likely to follow, inflation risks have eroded over the last few months. Below the surface, this trend looks to continue with housing costs finally starting to subside, with inflation excluding shelter running at a paltry 0.4% y/y. All in, the inflation outlook is looking a bit softer than we expected in our recently published forecast,” said James Orlando, Senior Economist with TD Economics.
“The BoC (Bank of Canada) is scheduled to meet next week and debate over whether the central bank will go big with a 50 basis point cut is rising. Thus far, the bank has been predictable, with a steady streak of 25 bp cuts over the last three meetings. Given the persistent strength of the jobs market, the BoC would be validated in maintaining its steady rate cutting pace. On the other side, market participants are increasingly betting on a 50 bp cut, assuming that the BoC will focus on the downside risks now that headline inflation has moved closer to the bottom end of its target range. Either way, it will be a close call for the BoC next week.”
Year over year, gasoline prices fell to a greater extent in September (-10.7%) compared with August (-5.1%), putting downward pressure on the all-items CPI, said StatsCan, adding that on a monthly basis, gasoline prices fell 7.1% in September following a 2.6% decline in August. The September decline was driven by lower crude oil prices amid increasing concerns over weaker economic growth, as well as lower costs associated with switching to winter blends.
“Prices for food purchased from stores rose 2.4% in September, the same growth rate as in August. This is the second consecutive month that grocery prices increased at a faster pace than headline inflation. While prices declined on a year-over-year basis for some food items, such as seafood and other marine products (-4.9%), nuts and seeds (-0.9%), and fish (-0.3%), others continued to increase and remained elevated, such as fresh or frozen beef (+9.2%), edible fats and oils (+7.8%) and eggs (+5.0%),” said the report.
“Additionally, prices for food purchased from restaurants rose at a slightly faster pace in September (+3.5%) compared with August (+3.4%).”
“On the cusp of the next BoC interest rate decision on October 23, the latest CPI report showed inflation pressures continuing to slow in Canada as expected in September,” said Claire Fan, Economist with the Royal Bank of Canada. “The drop in headline CPI reading may have been driven lower by lower gasoline prices but slower growth in the slew of Bank of Canada’s core inflation measures also pointed to progress. To be sure, shelter costs were still growing at a faster rate comparing to the rest of the consumer basket.
“But the scope of price pressure outside of shelter has now normalized more fully to what it looked like before the pandemic. Taken together with the third quarter release of the BOS survey last Friday that pointed to further unwinding in inflation pressures in the future, we think there’s little reason for the BoC to turn their worries back from a weakening economy to inflation, and expect them to go ahead with cutting by 50 bps next week.”
The Conference Board of Canada said lower prices for gasoline relative to the same month last year were largely responsible for the weaker pace of price growth. Yet, price pressures have decelerated unevenly. The Bank’s core inflation measures remained the same in September as they were in August, as did the CPI excluding food and energy
“The Bank is still aiming for a soft landing where economic growth isn’t unduly impaired by its recent monetary tightening cycle,” it said.
“Monetary policy remains in a contractionary range which, if maintained for too long, could sap demand further and drag inflation persistently below the two per cent target.”
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