Yahoo Finance Canada's inflation rate slows slightly, bolsters case for Bank of Canada to hold next week
Canada's annual inflation rate unexpectedly edged down in September, increasing 3.8 per cent as grocery price growth slowed and airfares fell, bolstering expectations that the Bank of Canada will hold rates next week.
Analysts had expected annual inflation to remain steady at 4 per cent, according to Reuters.
Statistics Canada said on Tuesday that the annual deceleration in inflation was broad-based, with price growth slowing in five of the eight major components, including food; clothing and footwear; health and personal care; recreation, education and reading; and household operations, furnishings and equipment. The deceleration was offset by an increase in gasoline prices. Gas prices jumped 7.5 per cent annually in September, up from 0.8 per cent in August, due to base-year effects.
On a monthly basis, CPI fell 0.1 per cent in September, a slowdown from August’s monthly gain of 0.4 per cent. Seasonally adjusted, CPI increased 0.2 per cent. Two of the Bank of Canada's three core measures of inflation also decelerated, with CPI-median decreasing to 3.8 per cent from 4.1 per cent in August, while CPI-trim edged down to 3.7 per cent from 3.9 per cent.
"The slowdown in most measures of inflation combined with the lower volatility across categories should easily give the Bank of Canada enough confidence to hold rates next week," Royce Mendes, Desjardins' managing director and head of macro strategy, wrote in a research note on Tuesday.
"We continue to believe that the central bank is done for the cycle and that shorter-dated yields are attractive at these levels in Canada."
Money markets trimmed bets for a rate hike next week after the data release. They now see a 16 per cent chance for a rate increase next week, down from 43 per cent before the CPI release.
CIBC economist Andrew Grantham wrote in a note that "a 3.8 per cent rate of inflation is never good, but for this month it was probably the best that we could have hoped for." He said the deceleration in September doesn't fully offset the upside surprises of the past few months, with Canada's annual inflation rate up 3.7 per cent for the third quarter, compared to the Bank of Canada's previous projection of 3.3 per cent.
"However, with activity in the economy stalling in Q2 and Q3, excess demand appears to be diminishing, suggesting that inflation should continue to decelerate in the quarters ahead without the need for further interest rate hikes," Grantham said.
The Bank of Canada will issue its next rate decision on Oct. 25. The central bank kept its benchmark rate steady at 5 per cent in September, but left the door open to further hikes if inflation pressures persist.
Food prices continued to decelerate in September, but still remained above headline CPI. The price of food purchased from stores increased 5.8 per cent annually, down from 6.9 per cent in August. The deceleration was driven by slowdowns in the price of meat (up 4.4 per cent), dairy products (up 4 per cent) and coffee and tea (up 2.7 per cent.)
Statistics Canada also noted that large monthly gains from September last year, when grocery prices increased at the fastest pace in 41 years, "fell out of the 12-month movements and put downward pressure on the indexes."
Prices for air travel dropped 21.1 per cent annually in September.
The price data come a day after the Bank of Canada released its latest business outlook survey that showed the indicator is at the lowest level in over a decade, except for a brief period in the early days of the COVID-19 pandemic. Companies say economic activity has slowed, and they expect sales to be subdued over the next year.
With files from Reuters
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.
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