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Canada's inflation rate cools, opens door to interest rate cut 'as early as Q2' 2024

A motorist fuels up a vehicle at a Shell gas station after the price of a litre of regular gasoline reached a new high of $2.40, in Vancouver, on Saturday, October 1, 2022. Canada's competition watchdog says Shell Canada Ltd. has agreed to divest some of its western assets to advance its $100 million deal to buy gas stations from grocery giant Empire Co. Limited. THE CANADIAN PRESS/Darryl Dyck
Canada’s annual inflation rate edged down in October, according to Statistics Canada. (THE CANADIAN PRESS/Darryl Dyck) (The Canadian Press)

Canada’s annual inflation rate slowed to 3.1 per cent in October as gas prices fell, reinforcing expectations that the Bank of Canada is done hiking interest rates.

Analysts had expected the Consumer Price Index (CPI) to cool to 3.2 per cent, according to Reuters, following an increase of 3.8 per cent in September. Statistics Canada said on Tuesday that the annual deceleration was largely the result of lower gas prices, as Canadians paid 7.8 per cent less for gas compared to last year, due in part to base-year effects. On a monthly basis, gas prices fell 6.4 per cent. Excluding gasoline, CPI increased 3.6 per cent in October.

Core measures of underlying inflation, closely watched by the Bank of Canada, also edged lower, with CPI-median dropping to 3.6 per cent and CPI-trim falling to 3.5 per cent, the lowest levels since December 2021 and November 2021, respectively. The decelerations in the preferred measures suggest that "price increases are becoming more concentrated, namely in mortgage interest costs," CIBC Capital Markets economist Katherine Judge wrote in a research note on Tuesday.

"The Bank of Canada will be more focused on its preferred core measures of trim and median, which should continue to decelerate on weak domestic demand, allowing policymakers to start cutting interest rates as early as Q2 next year," Judge wrote.

Food prices in Canada continued to slow in October, though they remain well above headline inflation. The cost of food purchased from stores increased 5.4 per cent annually, down from a 5.8 per cent increase in September.

Mortgage costs, rent and grocery costs were the largest contributors to the CPI increase, Statistics Canada said. On a monthly basis, CPI increased 0.1 per cent in October, following a 0.1 monthly drop in September. Seasonally adjusted, CPI fell 0.1 per cent.

"This is exactly the type of progress that central bank officials have been waiting to see," Royce Mendes, Desjardins' managing director and head of macro strategy, wrote in a research note on Tuesday.

"If the door wasn't already shut to additional rate hikes, it now should be."

While the rise in the price of goods slowed to 1.6 per cent in October, service prices increased 4.6 per cent, driven by higher prices for travel tours, rent and property taxes and other special charges.

BMO chief economist Douglas Porter said the results drive home that there is no further need for rate hikes from the Bank of Canada, "especially with the economy already struggling to grow at all and underlying inflation calming."

"While no one expected inflation to go quietly into the night, this is generally good news in the right direction," Porter wrote in a research note, although he noted that "it wasn't all good news" as services remain sticky.

"Before the Bank can even begin seriously considering rate relief, we'll need to see more evidence that services inflation is also moderating—that could be at least another six months down the road."

With files from Reuters.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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