Canadian inflation increases to 2% in October, but won’t derail rate cuts
Penelope Graham, Head of Content
The Bank of Canada’s battle with inflation tends to take one step forward and two steps back, and the latest numbers are no exception. Statistics Canada reports that the Consumer Price Index (CPI) ticked back up to 2% in October, after falling to 1.6% in September. The main factor behind the hotter growth of Canadian inflation was gas prices, which slowed by a lesser extent (-4%) than they did in the previous month, when they dropped by -10.7%.
On a monthly basis, the CPI increased by 0.4%, offsetting the same-sized decline the previous month.
Overall, consumer costs are higher, with the price of goods rising 0.1% year over year, after falling by 1% in September; that contributes to an increase of 10.2% over the last three years.
Food price growth is also heating back up, rising 2.7% in October compared to 2.4% in September; the third consecutive month that food inflation has outpaced that of the headline number, says StatCan.
One area where costs are lowering, however, is in the shelter inflation component; it rose by 4.8% compared to 5% in September. This is mainly due to low mortgage rate cuts implemented in recent months by the Bank of Canada; the mortgage interest cost index increased by 14.7% compared to 16.7% the previous month. That’s down considerably from their peak of 30.9% in August 2023.
Rent prices, while still quite steep, also grew at a slower pace in October, increasing 7.3% after September’s 8.2% gain.
What does the October CPI report mean for the Bank of Canada?
The main question for analysts and borrowers alike is, will this higher CPI reading dissuade the Bank of Canada from cutting its benchmark interest rate, or do so at a less aggressive pace than previously expected?
The central bank has now cut its benchmark Overnight Lending Rate a total of four times since June, bringing it down to 3.75% from its previous 5%, where it had remained since July 2023. The latest cut, passed down on October 23, was a larger half-point decrease than the usual quarter, reflecting the very low (1.6%) inflation reading that had come in for September. The Bank of Canada has been trying to lower inflation back to its 2% target since it soared at the end of pandemic lockdowns, hitting a 40-year high of 8.1% in June 2022.
However, analysts don’t expect this month’s higher reading to deter the BoC from its cutting path. In an economic note released before the reading came out, RBC economists Nathan Janzen and Abbey Xu forecasted its return to 2%, and stated that they “continue to think that inflation is more likely to drift broadly lower in Canada,” given the headline measure has now hovered around the 2% mark for three consecutive months.
“Given the Canadian economy’s weak momentum, we continue to expect the BoC to cut the overnight rate by an additional 50 basis points in December,” they wrote.
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Rate cut may be smaller than expected
Douglas Porter, Chief Economist and Managing Director Economics at BMO, also believes the BoC is on track to cut again next month, but may return to a quarter-point cadence, especially as the “core”inflation measures – those most closely watched by the bank – did increase more than expected.
The CPI median – which measures the value at the middle of price changes within the CPI basket of goods - rose to 2.5 from 2.3, while the CPI trim – which cuts out the most extreme price changes - ticked up to 2.6 from its previous 2.4.
“This heavy result should take some more steam out of the call for another 50 bp rate cut from the Bank of Canada in December,” Porter writes.
“We have been in the 25 bp camp from the start and this report only reinforces that expectation, along with evidence that housing is stirring, the Fed will turn more cautious, and a limping loonie. There are still the important Q3 GDP (next Friday) and jobs reports (following Friday) ahead of the next rate decision on December 11, but we are expecting big upward revisions to GDP, suggesting we'll need to see a truly tough jobs report to prompt another aggressive cut. At this point, most signs suggest the prudent course of action is a 25 bp rate cut path.”
The next Bank of Canada rate announcement is scheduled for December 11, 2024.
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Penelope Graham, Head of Content
Penelope has over a decade of experience covering real estate, mortgage, and personal finance topics and her commentary on the housing market is featured on both national and local media outlets.