EconoFACTS

October 17, 2023 | 09:16

Canadian CPI (Sep.) — License to Pause

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal nearly two decades. He is re-sponsible for the Canadian macro-econom... (Read more)

Canadian inflation surprisingly slowed in September with CPI falling 0.1% m/m (+0.2% in seasonally adjusted terms), trimming the yearly rate a couple of ticks to +3.8% y/y. The core metrics eased as well with the Trim down two ticks to 3.7% y/y and Median down three ticks to 3.8% y/y. The 3-month annualized rates also cooled for both metrics, though they remain at 3.5% or higher. Following yesterday's extremely weak BOS survey, this report should solidify the BoC holding rates steady at next week's policy meeting.

Before getting to the details, note that next month has a very favourable base effect for headline inflation (not quite as much for core), as CPI surged 0.7% in October 2022. Gasoline prices are down about 7% so far this month, so assuming there's isn't a sharp reversal in the next two weeks, we could get a big deceleration in Oct CPI (into the low-3% range).

The softness was pretty broad with a number of categories coming in below our expectations. A few examples: cell services (-3.2%), cleaning products (-0.9%), furniture/textiles (-1.7%), recreational vehicles (-2.5%). Food prices also continued to retreat, falling a touch from the prior month and cutting the yearly advance by more than a full percentage point to 5.8% y/y. The slowing trend in food price inflation is expected to continue through at least the turn of the year and likely into 2024. Importantly, services inflation was flat m/m, the lowest in nearly two years, with the yearly pace easing below 4% for the first time since early 2022. And, to further emphasize the breadth of softness, CPIX (old core) fell 0.1% m/m, the first decline since mid-2020.

Key Takeaway: With the Business Outlook Survey pointing to ongoing struggles for the economy (which saw GDP flat-line in the six months to July), and inflation coming in below expected, look for expectations to solidify around the BoC holding policy steady next week. The level of inflation remains much too high for comfort, but the trend is the BoC's friend here. Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we're likely to see ongoing disinflationary pressure...there's no need for further rate hikes in Canada.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics