Canada: Positive News on Inflation Means a Hawkish Hold at the BoC’s Next Meeting

It’s always a good day when the CPI inflation print comes in below economists’ forecasts. While energy and food prices made contributions to the slowing pace of inflation, the real action was in core price growth. Indeed, total CPI excluding food and energy edged up by 0.1% on a seasonally-adjusted basis—the slowest pace since June. On a year-over-year basis, it advanced by 3.2%, which is the most modest increase since November 2021. A decline in prices of furniture and household appliances from a year earlier, linked to the cooling housing market, certainly helped. A slowing pace of motor vehicle and shelter price growth also played a role.

Digging more deeply, the September inflation data looks even better. The year-over-year pace of the Bank of Canada’s (BoC’s) preferred measures of core inflation—CPI median and trimmed mean—decelerated to 3.8% and 3.7%, respectively. Turning to the 3-month annualized change in these measures, the median-CPI measure shed 0.9 percentage points to reach 3.5%. That’s the lowest print since December 2021. The trimmed-CPI measure wasn’t far behind at 3.8%, while the traditional measure of total CPI inflation excluding food and energy held steady at 3.3%. In contrast, the central bank’s latest measure of core inflation—core services excluding shelter—rose a tick to 4.3%, as it didn’t benefit from the slowing in goods and shelter price inflation.

The acceleration in total CPI inflation to 3.7% y/y in Q3 (from 3.5% in Q2) stands in contrast to the 3.3% advance projected by the Bank of Canada in its July 2023 Monetary Policy Report (MPR). While partly driven by an increase in the price at the pump as crude values unexpectedly moved higher, stickier-than-anticipated core CPI inflation also played a role. Indeed, core inflation remains more elevated than the Bank would like, as was made clear in the September interest rate announcement and recent comments from Governor Macklem.

While the September CPI release is unequivocally good news, the ongoing strength of inflation, particularly core inflation, has yet to reflect the recent weakness in real GDP growth. At -0.2% annualized, Q2 real GDP growth came in well below the Bank’s latest forecast of 1.5%. Q3 isn’t shaping up to be much better (we are tracking +0.3% versus the Bank’s 1.5%. And we expect this is only the start of the economic weakness in Canada (see our latest forecast here External link. This link will open in a new window.). The recent run up in bond yields has helped to reinforce this view. As such, we think the Bank of Canada will remain on hold at next week’s meeting, albeit accompanying the decision with a hawkish tone and a threat to raise interest rates again if the data don’t cooperate.