Introduction to Canada’s Inflation Rate
Canada’s headline inflation rate jumped more than expected to 2.4 per cent in September. Despite this increase, markets are still pricing in an interest rate cut from the Bank of Canada next week amid a weakening economy. Even though measures of core inflation remained firm, economists believe the soft economic backdrop will support further easing by the central bank at its October 29 policy decision.
Economic Outlook and Interest Rates
The economic outlook is fraught with risks, and the elevated unemployment rate reflects an economy with ample slack. Markets seem to agree, pricing the odds for an October cut at 69 per cent, just a smidge lower than the 77 per cent pre-release. Economists had been expecting inflation to hit 2.2 per cent, up from 1.9 per cent in August. The jump in September was attributed to gasoline prices falling less than they had in August, a slower year-over-year decline in travel tour prices, and accelerating grocery prices.
Core Inflation and Gasoline Prices
For September, CPI excluding food and energy rose by 2.4 per cent, the same as in August, while CPI excluding gasoline rose by 2.6 per cent, up from 2.4 per cent the month before. Measures of core inflation remained elevated at above three per cent. CPI-median rose by 3.2 per cent, the same as the month before, while CPI-trim rose by 3.1 per cent, up from three per cent in August. Core measures continue to look too strong for comfort, with the average monthly gain at 0.23 per cent, above the 0.17 per cent rate consistent with two per-cent inflation.
Bank of Canada’s Monetary Policy
In a recent speech, Bank of Canada deputy governor Rhys Mendes said markets were too focused on measures of core inflation, which the bank introduced as its preferred measures when making monetary policy decisions in 2016. Mendes said the bank now looks at a broader set of readings to determine underlying inflation, which it estimated to be around 2.5 per cent during its last policy rate decision in September. The central bank cut its policy rate last month by 25 basis points to 2.5 per cent, amid growing concerns of a weakening economy brought on by U.S. tariffs.
Regional Variations and Price Increases
Rent prices rose by 4.8 per cent, up from the 4.5 per cent increase in August. On a regional basis, Quebec reported a 9.8 per-cent increase in rent prices, reflecting rising rents in Montreal, while price increases in British Columbia grew by a moderate 1.8 per cent. Grocery prices rose by four per cent last month, up from 3.5 per cent in August, with growth driven by increased prices for fresh vegetables and sugar and confectionery items. Grocery inflation has trended upward since its recent low of 1.4 per cent in April.
Conclusion
In conclusion, Canada’s inflation rate has increased to 2.4 per cent in September, but markets are still expecting an interest rate cut from the Bank of Canada next week. The economic outlook is uncertain, and the central bank will need to balance the risks of inflation with the need to support the economy. As the Bank of Canada makes its policy decision, it will be closely watching the inflation rate, core inflation, and other economic indicators to determine the best course of action for the economy.
