EconoFACTS

October 15, 2024 | 09:20

Canadian CPI: Less Swift, Prompting Swifter BoC Cuts

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Canadian consumer prices fell 0.4% in September, helping chop the annual inflation rate to 1.6% from 2.0% the prior month. This is the first trip below the 2% target level since February 2021; in those 43 months, prices rose by a cumulative 16%, or at a 4.3% annualized pace. The latest dip was mostly driven by a 7.1% slide in gasoline prices (since partly reversed), as ex-gasoline inflation actually held steady at 2.2%. In a similar light, all the major measures of core held steady—median at 2.3%, trim and ex food & energy at 2.4% (that is not a typo in the table; none changed).

A bit more detail on the cores: The core CPIs were modestly higher from the prior month, with median up 0.2% m/m in seasonally adjusted terms and trim up 0.1%, keeping the yearly rates steady. The 3-month annualized pace for both is 2.1%, while the 6-month clip is 2.4% for both. The BoC was calling for core CPI to average 2.5% in Q3, and it's a tick lower at 2.4%. The undershoot was even more impressive on headline inflation, which averaged just 2.0% in Q3, while the BoC had pencilled in 2.3% in the July MPR; the deep drop in oil really helped.

The one small wrinkle in this month's release was that September is when tuition fees for the new school year are taken into account: They actually moderated this year to an average 1.8% increase from 2.5% last year. Most of the usual suspects on the high inflation side eased somewhat as well, with mortgage interest costs piping down to 16.7% from 18.8% (and last year's peak above 30%), while rents cooled a bit to 8.2% from 8.9%. Ex-shelter inflation eased further to a mere 0.4%, but of course that's helped by the 8% slide in energy prices in the past year. We will note a couple inflation thorns: auto insurance is now up 9.6% y/y, the fastest increase in more than two decades, and grocery price inflation held steady at 2.4%.

Bottom Line: Sliding energy prices were the big driver here, as core price inflation was largely as expected and essentially stable. Still, the long-awaited drop in headline CPI to below 2% is a watershed moment, which will help calm down inflation expectations. While gasoline will likely pop back up in next month's report, some of the hottest components of shelter costs are relenting and will act as an undertow on overall inflation in coming months. It's a close call, but we suspect that the big improvement in inflation, the still-high unemployment rate, and the still-sour consumer and business sentiment will be enough to prompt the Bank of Canada to opt for a 50 bp rate cut later this month. After all, the BoC has dovishly signalled that they are now more concerned about downside risks to the economy and the possibility that inflation may drop too low.

Table 1 - Canada — CPI

(month/month % change)

Source: BMO Economics, Haver Analytics