November 18, 2020 | 09:12
Canadian Inflation Rises: Lettuce Count the Ways
Canadian consumer prices rose 0.4% in October (and 0.3% in s.a. terms), above expectations of +0.2%. This follows a three-month run of very mild readings, and bumped up the annual inflation rate a couple ticks to 0.7%. While that matches the highest reading since the March shutdown, it's still below the pre-pandemic pace of just above 2%. We have gone on in recent months about the rare divergence between Canadian and U.S. headline inflation (with the U.S. the high-side outlier versus most other major economies). But that gap was chopped nearly in half last month, with the U.S. trend slipping to 1.2% y/y, leaving it a more moderate 0.5 ppts above Canada's October pace.
Core inflation trends also edged higher last month. Two of the Bank of Canada's three core measures rose by a tick, lifting the average of the three to 1.77% from 1.70% (revised from 1.73%). While still south of the Bank's 2% target, it's noteworthy that core has been grinding slowly higher from the May low of just under 1.6%, and is notably higher than the lows of around 1.4% hit after the 2008/09 recession. For one, the median measure is now back up to 1.9% y/y, only a tick below the pre-pandemic pace.
Major movers of the CPI last month, such as they were, included food and natural gas prices. After moderating through the past six months, grocery prices popped in October, with the annual rate rising a full point to 2.3% y/y. Yes, lettuce prices jumped 25% y/y, but there were a variety of sources of strength in the month along the grocery aisles. Natural gas prices also showed some strength for a change, partly reflecting the recent market strength in that commodity, rising 11.6% y/y versus almost no growth in the prior year. And, the sprint in home prices is beginning to show up (mildly) in the CPI, with replacement costs rising 3.6% y/y versus a small decline at the start of the year.
Of course, we are still looking at a sub-1% inflation rate, so there are a lot of sources of downward pressure on inflation. October marks the month that annual property tax increases are recorded, and they eased this year to 1.9% from 2.2%. And, offsetting the surge in home prices, mortgage interest costs slipped further to a drop of 0.8% y/y, which compares with a +7.0% y/y pace a year ago. Then there are also all those things that almost no one is spending on these days: hotel charges are down 23% y/y and airfares are off 5.4% y/y.
Bottom Line: October marks a mild high-side surprise for Canadian inflation, which has narrowed the gap with U.S. price trends. But the big picture is that inflation remains below 1%, and probably isn't going far with the economy about to face some further near-term challenges amid renewed restrictions. Looking further out, the underlying resiliency in core inflation is notable, and may force the BoC to fine-tune its communications sooner than expected.