Highlights:
- CPI inflation dropped to 2.2% in September year-over-year from 2.8% in August. Market expectations were for a more gradual slowing to 2.7%.
- The year-over-year increase in the transportation component slowed to an eight-month low as gasoline and airfare prices reversed earlier gains.
- Other major components like food and shelter saw price growth tick higher.
- The Bank of Canada’s core measures averaged 2.0% for the sixth month this year. This is the steadiest period of core inflation since 2011.
Our Take:
Canadian inflation slowed more than expected, returning to a 2.2% year-over-year rate in September after hitting 3% over the summer. The spike higher in July and August largely reflected a jump in the transportation component with both airfares and gasoline prices rising. Cooling in energy price growth was expected as last year’s hurricane-related increase in gasoline prices fell out of the calculation. It was the timing on airfares that caught us off guard, as July’s 16% spike was fully reversed in September. That the summer’s higher inflation was largely noise is reflected in the BoC’s favoured core measures, which on average haven’t budged from a 1.9-2.1% range since February. That compares with a 1.5% average last year. Those numbers are key to the Bank of Canada’s assessment that the economy has been “operating near capacity for the past year.”
The BoC has indicated higher rates will be needed to keep inflation on target, and we expect they’ll act on that bias next week by lifting the overnight rate to 1.75%. With markets having priced in that move for some time now, focus will be on the pace of tightening going forward. At their last meeting, Governing Council debated whether a gradual approach to raising rates remained appropriate. The topic will likely be discussed again next Wednesday. But even if the BoC goes for less explicit forward guidance, we don’t see them speeding up the pace of hikes. Household sensitivity to rising rates remains a key issue, and today’s inflation numbers allow the BoC to continue tightening at a manageable pace.
