October 20, 2021 | 09:11
Inflation: Clean-Up in Aisle 4.4
Canadian consumer prices rose 0.2% in September (and +0.4% seasonally adjusted), boosting the annual inflation rate to yet another 18-year high of 4.4% (from 4.1% the prior month). This was at the upper end of consensus, although a notch below our high-end call. Note that this latest pop was not really due to gasoline prices—while up 32.8% y/y, they actually dipped 0.1% in September, but another jump looms there for next month's report (they're on track to rise 5% in October). Instead, some of the biggest drivers in the month were new homes, meat, and rent, partially offset by a pullback in airfares and hotel charges.
The Bank of Canada's three preferred measures of core inflation continue to send very conflicting messages, running all the way from a "too hot" 3.4% for the trim, to a "just right" 1.8% for the common component measure. However, the average of the three nudged up again to 2.67% y/y (from 2.60%), while the ex food & energy metric is now up 3.3% y/y. For comparison, the U.S. core CPI is currently running at an even hotter 4.0%, while the headline measure is 5.4% (still a full point north of Canada's rate).
While pump prices may have taken a one-month break, food costs stepped into the void with a heavy 0.9% m/m jump (in s.a. terms). Grocery prices are now up 4.2% y/y, led by a 9.5% spike in meat costs. Elsewhere, many of the main drivers of the recent inflation burst mostly just maintained their hot pace, with new vehicle prices still at 7.2% y/y, and homeowner replacement costs (i.e., new home prices) just edging up further to a fiery 14.4% y/y. September is the month when tuition fees are captured, but this was a non-story this time as they held steady this year at 1.9% y/y.
Bottom Line: While the September monthly move in consumer prices may have lacked drama, landing close to expectations, the big picture is that inflation continues to march higher, with pressures broadening out. Note that the Bank of Canada looked for headline inflation to ease to 3.5% by Q4 in their latest official projections (done back in July)—that call looks well light, as CPI is likely to hold above 4% in the months ahead. Short-term metrics continue to point higher, most measures of core are running around 3% or higher, and gas prices are about to make more noise, so the heat is still on for inflation. We now look for inflation to average 3.3% both this year and next, albeit fading to below 2.5% a year out. Suffice it to say, that strains the definition of transitory.