Canada’s inflation rate unexpectedly dipped in September, a result that alleviates pressure on the Bank of Canada to resume raising interest rates next week.
The Consumer Price Index rose 3.8 per cent in September from a year earlier, down from 4 per cent in August, Statistics Canada said Tuesday in a report. Analysts on Bay Street were expecting the inflation rate to remain at 4 per cent. The CPI fell 0.1 per cent on a monthly basis.
The Bank of Canada has warned that bringing inflation back to its 2-per-cent target could be a bumpy ride, and that’s proven to be the case. After easing to 2.8 per cent in June, the annual inflation rate climbed over the summer, largely because of higher energy prices.
Live updates: Canada annual inflation rate edges down to 3.8% in September
Now, inflation is back on a downward trajectory. Higher interest rates are weighing on consumption across the economy, while gasoline prices have fallen in recent weeks. Economists said the October CPI report should bring another decline in the inflation rate.
Tuesday’s report had a significant effect on monetary policy expectations. Bond yields tumbled after the release, while financial markets priced in lower odds the Bank of Canada would raise its benchmark interest rate by a quarter-point on Oct. 25, its next decision date.
To date, the BoC has raised its key rate to 5 per cent – the highest since 2001 – from crisis lows of 0.25 per cent. This abrupt shift in lending conditions is putting pressure on household and government finances, while economic growth has stagnated in recent months.
Some analysts on Bay Street said the Bank of Canada had done its job with interest rates – that 5 per cent was likely the peak for this cycle.
“Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure,” Benjamin Reitzes, a Bank of Montreal strategist, said in a client note. “There’s no need for further rate hikes in Canada.”
There were widespread improvements in September. Grocery prices rose 5.8 per cent in September on a year-over-year basis, down from 6.9 per cent in August. At peak levels, grocery inflation was running at more than 11 per cent. This deceleration was foreshadowed by weaker price increases – or even declines – at earlier stages of the food supply chain.
Over the past year, prices have risen 4.4 per cent for meat, 4 per cent for dairy products and 3 per cent for fresh fruit. However, Statscan cautioned that prices were being compared to a spike last year, a “base-year effect” that is leading to more subdued numbers.
“The slowing trend in food price inflation is expected to continue through at least the turn of the year and likely into 2024,” Mr. Reitzes said.
Supply-chain issues appear to be firmly in the rearview. Prices for durable goods rose just 0.4 per cent in September from a year earlier, down from 1.4 per cent in August. Goods related to the beleaguered housing sector – such as furniture and appliances – are declining in price.
The travel industry had an outsized effect on the September numbers. Airfare prices fell 21 per cent, which Statscan attributed to a larger availability of flights.
Still, there are some pesky aspects of inflation. Housing costs rose 6 per cent in September, matching the annual gain seen in August. Rents jumped 7.3 per cent in September, up from 6.5 per cent in August, a sign of how Canada’s housing shortage is affecting the numbers.
But over all, inflationary pressures are abating. The Bank of Canada’s preferred measures of core inflation, which remove volatile movements in the CPI, slowed down in September.
Royce Mendes, head of macro strategy at Desjardins Securities, said around 40 per cent of the items in the CPI basket were experiencing inflation of 5 per cent or higher – down 10 percentage points from August.
“The slowdown in most measures of inflation combined with the lower volatility across categories should easily give the Bank of Canada enough confidence to hold rates next week,” he wrote in an investor note.
Interest-rate swaps, which capture market expectations about monetary policy, are pricing in a 15-per-cent chance the BoC hikes interest rates by a quarter-point, down from 42 per cent before the inflation report was published.
“Canadian consumers can breathe a sigh of relief, firstly because inflation appears to be easing again and secondly because that deceleration diminishes the chances of further interest rate hikes from the Bank of Canada,” Andrew Grantham, senior economist at CIBC Capital Markets, said in a research note.
“While inflation is admittedly still well above target, there were signs within today’s release that the weakening of domestic demand is now starting to impact pricing in some areas and should continue to do so moving forward, without the need for further interest rate hikes.”
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