Experts see inflation uptick as temporary, with a downward trend still shaping Canada’s economy
The October inflation report from Statistics Canada, due Tuesday, is expected to indicate a slight increase in the consumer price index (CPI).
Economists polled by Reuters project a 1.9 percent rise, up from September’s 1.6 percent, the lowest level since February 2021.
Despite this uptick, experts believe the long-term downward trend in inflation remains intact, as reported by BNN Bloomberg.
Gasoline prices played a significant role in September’s low inflation, with oil prices dipping to US$65 per barrel. In October, oil prices rebounded to over US$75 per barrel, contributing to the expected inflation increase.
“We’re expecting headline to go back up to two percent, but just like how it dropped down to 1.6 percent, it’s mostly an energy story,” said RBC economist Claire Fan.
Fan noted that shifts in last year’s baseline are influencing the expected increase and emphasised that this does not signify a reversal in the progress made in reducing inflation.
“The broad story really is that this low inflation, or progressively easing inflation pressure, it’s still very much the trend,” she said.
Excluding energy and food, core inflation is anticipated to dip slightly to 2.2 percent in October from 2.4 percent in September, according to Fan.
BMO Capital Markets projects core inflation at 2.4 or 2.5 percent, with headline inflation at 1.9 percent.
Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategy, described October’s increase as “a bump in the road for the downward trend in inflation.”
Rising property taxes are expected to drive shelter costs higher, while mortgage interest costs will see smaller increases following the Bank of Canada’s rate cuts.
High mortgage payments and renewals have added pressure on shelter inflation, but Fan suggested that relief may be near. “On a month-over-month basis, I think we are, if anything, very close to an inflection point,” she said.
Rental inflation, averaging 8.3 percent in the third quarter—the highest since the 1980s—remains a concern.
Desjardins economist Maëlle Boulais-Préseault indicated that rent inflation is expected to slow over the coming years, aligning with a higher unemployment rate and weaker population growth.
In contrast, owned accommodation price growth has decelerated to 5.5 percent as borrowing costs decline.
The Canadian economy continues to diverge from the US. While US inflation rose to 2.6 percent in October, Canada’s inflation rate remains lower. Differences extend to GDP per capita, with Canada’s measure three percent below 2019 levels, while the US is eight percent higher.
The Canadian dollar has been under pressure, trading at its weakest levels since 2020. These factors, coupled with October’s inflation data, suggest differing monetary policy responses from the Bank of Canada and the US Federal Reserve.
BMO’s Reitzes expects a quarter-percentage-point rate cut at the Bank of Canada’s December 11 meeting. Conversely, RBC anticipates another half-point cut, citing weak economic conditions and the delayed impact of rate changes.
“Given how weak current conditions are, and given the fact that even if you cut rates today, it won’t help with things until probably at least a couple quarters down the road, they really want to front load any amount of easing,” Fan explained.
“If they think the economy needs the support, they want to do it as quickly as possible.”
