HomeContributorsFundamental AnalysisCanada: Cooler Headline Inflation Belies Hotter Core Reading in September

Canada: Cooler Headline Inflation Belies Hotter Core Reading in September

Consumer price inflation took another small step in the right direction in September, easing to 6.9% year-on-year (y/y), down from 7.0% in August.

Lower gasoline prices were mainly responsible for the cooling in headline inflation. Consumers got some relief at the pump, with prices down 7.4% in September, and are now up 13.2% y/y.

Unfortunately, there is no relief at the grocery store. Food purchased from stores cost 11.4% more than a year ago, up from August’s 10.8% y/y pace – the fastest pace since 1981.

Core inflation was also a little hot under the collar. CPI ex-food and energy ticked up to a 5.4% y/y pace in September, from 5.3% y/y in August. Shelter inflation, which carries a heavy weight in the CPI was up 6.8% y/y in September, two ticks higher than August’s pace. Within shelter, the uptick was driven by higher mortgage interest costs (+8.3% y/y) outweighed the deceleration in homeowner’s replacement cost (+7.7% y/y) and other owned accommodation expenses (+5.8%).

Durable goods inflation heated up again in September (+6.7% y/y) from a 6% y/y pace in August. Vehicle prices were up 8.4% y/y, and furniture was up 13.3% y/y, both faster than August’s pace.

The Bank of Canada’s core inflation metrics were unchanged from August. CPI-trim held steady at 5.2% y/y, CPI-common was 6.0% y/y, and CPI-median was 4.7%. The average of the three core measures was 5.3% y/y in September.

Key Implications

It is great that headline inflation took a small step in the right direction in September, but underlying inflation pressures in core measures showed no signs of cooling down. The BoC has hiked interest rates 300 basis points so far this year, and the impact of that is starting to be felt in the economy, from housing to consumer spending. But, with the Bank of Canada’s (BoC) core measures of inflation more than 2 percentage points from the target range of 1-3%, more cooling in demand is required.

Today’s report emphasizes the need for a hefty 50 basis point hike next week in the BoC’s overnight rate. We expect the bank is getting closer to a pause on rate hikes, once it reaches 4% by the end of the year.

TD Bank Financial Group
TD Bank Financial Grouphttp://www.td.com/economics/
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.

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