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Inflation rate falling

“No need for further rate hikes” after inflation surprises to the downside

With Canada’s headline inflation rate once again trending downward, next week’s Bank of Canada rate decision is now looking decidedly more like a rate hold.

On Tuesday, Statistics Canada reported that headline CPI inflation rose 3.8% in September, down from August’s 4% growth. The drop was due largely to lower prices for groceries, durable goods and travel-related services.

12-month change in headline inflation

On a monthly basis, headline CPI fell 0.1% in September following a 0.4% gain in August.

There were encouraging signs in the closely-watched core measures of inflation as well, which rose at their slowest pace in 31 months, according to National Bank. CPI-trim eased to 3.7% year-over-year (from 3.9% in August), while CPI-median slowed to 3.8% from 4.1%. Looking at the three-month annualized change, these measures came in at 3.8% and 3.5%, respectively.

Looking ahead to October, BMO economist Benjamin Reitzes notes that headline inflation data is expected to benefit from favourable base effects given that CPI surged by 0.7% l12 months ago (which will lessen the year-over-year comparison).

“Gasoline prices are down about 7% so far this month, so assuming there’s isn’t a sharp reversal in the next two weeks, we could get a big deceleration in October CPI (into the low-3% range),” he wrote.

“No need for further hikes”

Economists were largely in agreement that the slowing pace of inflation means the Bank of Canada is less likely to deliver another rate hike at next week’s monetary policy meeting.

“The level of inflation remains much too high for comfort, but the trend is the BoC’s friend here,” Reitzes wrote. “Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure…there’s no need for further rate hikes in Canada.”

Economists at National Bank Financial agree, writing that the September data will “take a lot of pressure off” the BoC to deliver additional rate hikes, despite core inflation measures remaining elevated and not slowing as much as the headline reading.

“But the bank is now facing a dilemma. It was easy to raise rates when the economy still had momentum and was showing signs of overheating. But this is no longer the case,” they wrote.

“Inflation has surprised them on the rise, but economic growth in the second and third quarters is well below its July forecasts,” the economists added. “What’s more, there are no signs of an upturn in the months ahead, with consumer and SME confidence now at levels seen only during a recession.”

Shelter costs the fastest-growing inflation component

Rising shelter costs continued to be one of the main contributors to overall inflation, and is now the fastest-growing component as well.

In September, shelter (+6% year-over-year) overtook food (+5.9%) as the fastest-rising basket item now that food prices are easing.

Looking at the shelter sub-components, the gains were driven by the rent index, which was up 7.3% year-over-year, and the mortgage cost index, which eased slightly to +30.6% in September from +30.9% in August.

Rent prices rose the fastest in Newfoundland and Labrador (+11.8%), Nova Scotia (+10.6%) and Alberta (+8.5%).

While this per capita index is up over 30% year-over-year, actual mortgage interest costs in dollar terms as of the second quarter have risen over 80% since the Bank of Canada started hiking interest rates, data released from Statistics Canada show.