Canada: Inflation Perked Up in October but That Won’t Derail a December Rate Cut

While nobody likes to see inflation moving higher, Canadians can take some comfort in price growth having been at or below the Bank of Canada’s 2-percent inflation target for three months in a row. Goods prices continue to lead headline price gains lower, despite turning positive on a year-over-year basis for the first time in three months (0.1% y/y) (graph 1). Lower gasoline prices (-4.0%) explained a big part of the disinflationary goods print (despite rising 0.7% on a month-over-month basis), while food prices edged up a couple of ticks to 3.0% in October—the third consecutive monthly move higher. Excluding food and energy, goods inflation was flat in the month, following four consecutive year-over-year declines. At the same time, services inflation slowed for the fourth month in a row but remained stickier at 3.6%. 

Services inflation is being kept aloft by sustained growth in the cost of housing. Shelter inflation excluding energy continues to make by the largest contribution headline inflation (graph 2). While growth in the cost of rented accommodation was a still-elevated 7.1% y/y in October, it has now slowed sharply since reaching its peak in August and our research External link. suggests it should slow even more quickly going forward. Meanwhile, the weightier owned accommodation inflation slowed to 5.0% in the month, the slowest year-over-year gain since June 2021. That’s despite property taxes, which are priced annually in October, rising 6.0% on the year—the largest increase since 1992. 

Looking to underlying inflation, the Bank of Canada’s preferred measures of core year-over-year price growth—CPI median and trimmed mean—were two ticks higher than in September (averaging 2.6% y/y), although managing to stay under 3% for the seventh consecutive month. The Bank’s former preferred measure of core inflation—CPIX (CPI excluding the 8 most volatile components & indirect taxes)—also inched a tick higher to 1.7%. In contrast, the more universally referenced total CPI inflation excluding food and energy edged slightly lower in September (2.3%). But maybe more telling, the annualized 3-month moving average of these seasonally adjusted series all moved considerably higher in October, suggesting there may be some broad-based inflationary pressures brewing that we’ll need to keep an eye on (graph 3). 

With inflation perking up in October, particularly near-term core prices, we have more conviction in our call for the Bank of Canada not to make a second consecutive 50 basis point cut. That said, we still believe that the Bank of Canada will cut the policy rate by 25 basis points in December. For one, inflation remains around 2%. In addition, Governor Macklem made clear in October that base effects—low month-over-month price growth a year ago pushing year-over-year price gains higher now—would keep inflation elevated around the turn of the year. As such, we think the Bank is likely to look through any short-lived reacceleration in price growth. Not only has inflation been at or below target but growth has underperformed the Bank’s expectation as well, tracking closer to 1% in Q3 than the 1.5% in the central bank’s most recent forecast. And while Q4 is tracking in line with the Bank’s outlook, the impending mortgage renewal wall and slower population growth suggest the economic outlook is likely to be much less rosy than the Bank of Canada anticipated last month. The outcome of the US election just compounds this downside risk. To counteract these headwinds, we expect the Bank to cut interest rates an additional five times in 2025. (See our latest Economic and Financial Outlook External link. for more information on our forecast.)