Highlights:

  • The year-over-year increase in all items CPI rose to 1.6% in September from 1.4% in August.
  • Much of the increase in headline inflation reflected higher energy prices as hurricane-related refinery shutdowns in the US put upward pressure on gasoline prices.
  • Rising food prices were also a factor with that component continuing to rebound from multi-decade lows earlier this year.
  • Year-over-year inflation excluding food and energy fell to 1.2%, its lowest reading since 2014, as clothing and footwear price deflation intensified.
  • Just one of the Bank of Canada’s three preferred core measures rose in September, with the average unchanged at 1.6% after rounding.

Our Take:

Today’s inflation report was a mixed bag, with an energy-driven increase in the headline reading, little change in the Bank of Canada’s core measures and a decline in ex food and energy inflation. Overall, there wasn’t as much evidence this month that the economy’s strong growth trend and limited economic slack are pushing inflation up toward the central bank’s 2% target. Given their "particularly data dependent" stance, we think this gives the bank cover to be a bit more patient in removing accommodation following consecutive rate hikes in July and September. We don’t see the bank raising their benchmark interest rate again next Wednesday.

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With no move expected, our eye will be on the Bank of Canada’s updated economic projections—particularly whether they see any remaining economic slack and if they think the economy’s ‘speed limit’ has picked up amid stronger productivity growth. Any indication that the economy has more room to run without generating inflationary pressure will likely be seen as a dovish development. But on balance, we think the combination of an economy near capacity and still-accommodative monetary policy calls for further, gradual rate increases. We expect the next hike will come in December but we’ll likely need confirmation that above-trend growth continued into the second half of the year for that to happen.

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