Canada: Cooler Inflation in October All but Closes the Door to Rate Hikes

With some of today’s drop in headline CPI inflation baked in due to base effects—the downdraft from a large monthly increase a year prior—an improvement from September’s 3.8% y/y print was largely preordained. But a big part of the improvement in October can also be chalked up to lower gasoline prices (-7.8%) and a further deceleration in goods prices (to 1.6% from 3.6% in September). In contrast, services prices accelerated in October to 4.6% (from 3.9%), driven by a rise in the cost of rent and the largest annual property tax increase since October 1992. This helped to push total CPI excluding food and energy slightly higher on a year-over-year basis. Meanwhile, prices excluding food in stores, energy and shelter remained running at a year-over-year pace of just 2.0%. As our Macro Strategy team has highlighted, that indicator is a better reflection of the prices that monetary policy can control.

Digging deeper, the October inflation data looks even better. The Bank of Canada’s (BoC’s) preferred measures of core inflation—CPI median and trimmed mean—decelerated to 3.6% and 3.5%, respectively. Turning to the 3-month annualized change in these measures, the median-CPI measure shed 0.8 percentage points to reach 2.7%. That’s the lowest print since March 2021. The trimmed mean-CPI measure wasn’t far behind at 3.2%, while the traditional measure of total CPI inflation excluding food and energy slowed to 3.3% (graph).

While the October inflation print is no doubt music to the Bank of Canada’s ears, this is paired with real GDP growth that is tracking only slightly better than flat in Q3. That’s well below the Bank’s forecast of 0.8% annualized published last month. Together with a falling vacancy rate and gradually rising unemployment rate, our analysis suggests excess demand is slowly being brought to heel. This should help to gradually push underlying inflation back to the Bank of Canada’s 2% target. As such, we think the Bank of Canada is likely to remain on hold for the foreseeable future, with its next move expected to be a rate cut around the middle of 2024. (See recent analysis External link. This link will open in a new window. from our Macro Strategy team on how long rates can stay high for more information.)