November 17, 2021 | 09:13
Canadian CPI: Fahrenheit 4.71
Canadian consumer prices rose 0.7% in October, sending the annual inflation rate further north to 4.7% from 4.4%. These robust readings were right in line with our call as well as the final consensus—it's almost a relief in 2021 when hot inflation readings aren't even hotter than expectations. Technically, the yearly rate is actually still a smidge below the Feb/2003 highwater mark (to the second decimal place it was 4.65%), so we're still "only" at an 18-year high. While perhaps not quite as eye-popping as the latest 6.2% U.S. headline inflation print, this still marks a massive upswing from inflation of just 0.7% a year ago.
After a one-month lull, gasoline prices jumped again, rising 5.0% in the month and up 41.7% y/y—the good news is that pump prices look to be about flat in the current month. But just as pump prices may (emphasis "may") be stabilizing, other necessities are grabbing at the baton; natural gas and fuel oil costs both jumped almost 9% m/m, while food is on the march. Grocery prices rose 3.9% y/y, with meat up nearly 10% from a year ago. One small source of moderation: October is the month that property taxes are tallied, and they eased to 1.5% this year from a 1.9% hike last year.
The Bank of Canada's three main measures of core were curiously all unchanged (after minor revisions to the prior month), again averaging just under 2.7%. As usual, there is something for everyone in the three cores, with the trim too hot (3.3%), the common component a bit cold (1.8%), and the median about right (2.9%). The BoC tends to put the most weight on common, but it very much looks like an outlier compared with almost every other serious measure of underlying inflation. Ye olde CPI ex food & energy, which is a perfectly good core measure for almost every other economy, actually eased slightly on a yearly basis to 3.2%, albeit still a bit outside the BoC's 1%-to-3% comfort zone.
Looking ahead, it's possible there may be a brief reprieve in November's reading, as the y/y comparison is a bit easier (prices rose a meaty 0.4% in s.a. terms a year ago), and gasoline prices have roughly flattened. Still, a test of 5% by the end of the year still looks possible, depending on the vagaries of food and energy costs. Note that the BoC penciled in an average inflation rate of 4.8% in Q4 in their latest forecast, so they were certainly expecting a run-up by year-end, and will not at all be surprised by today's lofty result.
Bottom Line: First, there is no debate that inflation continues to chug higher, heavily testing the upper thresholds of BoC comfort. Second, there are still very serious risks that this episode may last even longer, heavily dependent on food and energy costs, as well as the extent to which this pop affects longer-term expectations and wages. Still, the small mercy is that today's result was no worse than expected. Looking into 2022, we continue to lean to the high side of consensus, and expect inflation to average roughly 3.5% next year (after 3.3% in 2021). While that may not sound concerning given today's 4.7% read, it would still mark the first time since 1991 that inflation has averaged more than 3% for two full years in a row.