By Inflation in Canada showed unexpected signs of cooling last month, with the cost of groceries increasing at a slower rate and consumers finding some relief in airfare prices. While this deceleration is likely to be welcomed by central bank policymakers, it’s important to note that inflation continues to run well above the target and is tracking ahead of the most recent forecast.
Consumer-Price Index
According to Statistics Canada, the consumer-price index, which is a closely watched inflation gauge, rose by 3.8% from the previous year. This figure came as a surprise to the market, as expectations were for the index to advance by 4.0%, maintaining the same pace as the previous month.
Monthly Changes
Compared to August, the consumer-price index fell by 0.1% in September, which was weaker than the consensus expectation of no change. However, on a seasonally-adjusted basis, inflation still managed to advance by 0.2% compared to the previous month.
Impact on Monetary Policy
The inflation report will play a crucial role in shaping the central bank’s decision on interest rates during the upcoming policy meeting on October 25th. Bank of Canada officials have expressed concerns about the persistence of underlying inflationary pressures. They are trying to strike a balance between ensuring that monetary policy is not too restrictive while also avoiding overtightening before past rate increases have had time to slow down demand.
Core Inflation Measures
Two core inflation measures closely monitored by the Bank of Canada, namely weighted median and trimmed mean, cooled down in September to an average of 3.75% from 4.0% in the previous month. However, these measures have remained stuck between 3.5% to 4% for approximately a year, despite the bank’s efforts to bring annual inflation back down to its target of 2%.
Overall, the unexpected slowdown in inflation provides some relief for policymakers, but there are still concerns about the persistently high inflation rates. The upcoming policy meeting will be crucial in determining how the central bank responds to these challenges.
The Canadian Economy Faces Inflation Challenges
The Bank of Canada is preparing to release its updated projections next week, shedding light on the country’s economic outlook. Inflation, which experienced a rapid deceleration from its peak of 8.1% in the summer of 2022, is expected to remain at around 3% for approximately one year. It’s worth noting that these comparisons to the previous year are becoming more challenging due to the steady cooling of inflation until recently.
The most recent report highlights that grocery prices continue to stay high, surpassing the headline inflation rate. However, the pace of increase has been gradually slowing, with a year-on-year rise of 5.8% in September compared to a 6.9% increase in the previous month.
Durable goods prices also experienced a deceleration last month, primarily driven by a smaller price rise for new passenger vehicles. Improved inventory levels compared to last year contributed to this development.
On the other hand, airfare costs decreased for Canadians as airlines expanded their flight offerings over the past year. Non-durable goods experienced an acceleration in price growth in September, and gasoline prices rose at a faster pace. Excluding gasoline, the Consumer Price Index (CPI) advanced by 3.7% after a 4.1% increase in August.
The Bank of Canada recently decided to maintain its policy rate at a 22-year high of 5%, following consecutive quarter-point increases in June and July.
Despite signs of economic cooling in recent months, the latest jobs data reveals that wage gains for permanent employees are surpassing inflation rates and accelerating on a monthly basis. However, this presents a challenge for the central bank in its efforts to control inflation. Business expectations remain elevated in the near term, with recent surveys indicating that businesses anticipate inflation will take longer than three years to return to target levels.
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