October Inflation: A Mixed Bag for The Bank of Canada Ahead of December Rate Decision
The comments below are an edited and abridged synopsis of an article by Jeff Lagerquist
Canada’s annual inflation rate rose to 2% in October, slightly above expectations and presenting a challenge for the Bank of Canada (BoC) as it considers its next move on interest rates. Economists remain divided on whether this hotter-than-expected reading will deter the central bank from delivering its anticipated rate cut in December.
Statistics Canada reported that the Consumer Price Index (CPI) accelerated from 1.6% in September, with base-year effects from gasoline prices playing a significant role. The BoC’s core inflation measures also edged higher: CPI-median increased to 2.2% from 2.1%, and CPI-trim rose to 2.6% from 2.4%.
Inflation And Economic Context
Katherine Judge of CIBC Economics acknowledges the disappointment this uptick brings to the BoC but remains optimistic about a 50-basis-point (bps) rate cut, citing slack in the economy expected to be confirmed by forthcoming GDP and labor market data. Similarly, Desjardins’ Randall Bartlett predicts a 25-bps cut, emphasizing that base effects and weaker-than-expected growth could prompt the BoC to overlook the temporary acceleration in inflation.
Bank of Canada Governor Tiff Macklem previously assured Canadians that inflationary pressures were easing. The central bank has already cut rates four times since June in efforts to stabilize the economy.
Sectoral Inflation Insights
Gasoline prices, while still declining, fell less sharply in October (-4%) than in September (-10.7%), contributing to the headline inflation rate. Rising grocery costs continued to outpace overall inflation, with fresh vegetable prices climbing and beef price increases slowing. This marks the third consecutive month where food price growth has surpassed headline inflation, highlighting ongoing pressure on household budgets.
Rental costs remain elevated, though their annual increase slowed to 7.3% in October from 8.2% the previous month. The shelter category as a whole, which includes rents, mortgages, and property taxes, saw price growth ease slightly to 4.8% year-over-year. Notably, property taxes experienced their largest annual increase since 1992, with Newfoundland and Labrador and British Columbia seeing the sharpest hikes.
What’s Next for The Bank of Canada?
Economists from BMO, TD, and Scotiabank largely agree on a 25-bps rate cut in December but stress that upcoming GDP and jobs data will heavily influence the BoC’s decision. While October’s inflation reading complicates the narrative, most analysts see it as a minor setback rather than a game-changer.
The BoC’s path forward hinges on whether this inflation uptick proves to be short-lived. As the central bank evaluates mixed economic signals, its December 11 decision will be pivotal in shaping Canada’s economic outlook heading into 2024.
In the meantime, consumers continue to grapple with higher costs, particularly for essentials like food and shelter, underscoring the ongoing challenges of inflation even amid signs of broader economic stabilization.