With the Bank of Canada meeting next week to discuss interest rates, I wanted to provide some insights as this continues to be a hot topic.
Highlights:
• September’s inflation report exceeded expectations, signaling the end of a three-month upward trend.
• Headline and core inflation rates dropped year-over-year, indicating a potential peak in the 5% Bank of Canada policy rate.
• While rate cuts aren’t expected until mid-next year, the worst of the tightening cycle may be over and we’re optimistic that there will be no rate increase next week.
Long Version:
September’s inflation report exceeded expectations, marking the end of a three-month upward trend. Both headline and core inflation rates dropped year-over-year and on a three-month average basis. Coupled with a weak Business Outlook Survey, this suggests the 5% policy rate may be the peak. Rate cuts aren’t expected until mid-next year, but the worst of the tightening cycle may be over.
Gasoline prices spiked 7.5% in September due to a base-year effect, offsetting the overall CPI deceleration. Excluding gasoline, CPI rose 3.7% in September. Looking ahead, the October CPI is expected to benefit from a favorable base effect, potentially reaching the low-3% range.
Monthly, CPI decreased 0.1% in September, mainly due to lower gasoline prices. Goods inflation fell 0.3%, a first since December 2022, while services inflation held steady on a monthly basis but slowed to 3.9% year-over-year.
Consumer perception of inflation remains higher than actual figures, partly due to prominent grocery and gasoline prices. Food inflation decelerated to 5.9%, while CPI excluding food and energy hit a cycle-low of 2.8%.
Durable goods prices rose at a slower pace in September, driven by reduced costs for new passenger vehicles, furniture, and household appliances. Air transportation costs dropped significantly.
Core inflation measures followed by the Bank of Canada also showed deceleration. Although underlying price pressures remain above the 2% target, a slowing global economy may bring inflation closer to the target range next year. The central bank will proceed cautiously, postponing rate cuts until mid-next year, as the full impact of rate hikes is yet to be realized.