Canada’s inflation rate perked up by more than expected in October, weakening the case for the Bank of Canada to make another outsized cut to interest rates next month.
The Consumer Price Index rose at an annual rate of 2 per cent in October, up from 1.6 per cent in September, Statistics Canada said Tuesday in a report. Financial analysts were expecting an upturn to 1.9 per cent.
The inflation rate was guided higher by less flattering year-over-year calculations for gasoline prices and hefty increases in property taxes. On a monthly basis, the CPI rose 0.4 per cent.
The Bank of Canada is unlikely to be fazed by the increase in headline inflation, which has been at or below the central bank’s 2-per-cent target for three consecutive months. The BoC is widely expected to continue lowering interest rates to invigorate a sluggish economy and prevent inflation from settling below the target.
Reaction and analysis: Canada’s inflation rate jumps back up to 2% in October
But Tuesday’s report also showed that core measures of inflation – which strip out volatile movements in the CPI – heated up last month, an unwelcome development. This could prompt the BoC to shift back to rate cuts of a quarter-percentage-point after its half-point reduction in October.
“The BoC is likely to view today’s data release as a minor setback,” said James Orlando, senior economist at Toronto-Dominion Bank, in a client note. “Inflation had become a background worry, and while it isn’t raising any red flags yet, today’s data is a reminder that getting price growth to settle at 2 per cent will take time.”
Mr. Orlando is one of several Bay Street analysts who expect the BoC to cut rates by 25 basis points at its next decision on Dec. 11, although some are sticking with their 50-basis-point predictions for now. (A basis point is 1/100th of a percentage point.)
“As a result of the upside surprise, which suggests a tad more stickiness in inflation than expected, we have more conviction in our call that the Bank of Canada will cut rates just 25 basis points in December,” said Royce Mendes, head of macro strategy at Desjardins Securities, in a client note.
Gasoline had a tangible effect on Tuesday’s results. Prices rose slightly on a monthly basis, while year-over-year the decline in October was less than that of September, thus acting as less of a drag on the headline inflation rate.
Excluding gas, the CPI rose by an annual 2.2 per cent in October, matching the previous two months.
Property taxes rose 6 per cent in October, year-over-year, up from 4.9 per cent in 2023 and the largest increase since 1992. Statscan makes an annual update to its property tax numbers in every October CPI report.
Over all, housing inflation is trending lower. Shelter prices rose 4.8 per cent in October, year-over-year, compared with 5 per cent in September. Mortgage interest cost increases are slowing as the BoC cuts interest rates, and rents rose by an annual 7.3 per cent, down from 8.2 per cent in September. Still, national rents have jumped 25 per cent since the end of 2019, underscoring the financial headwinds facing millions of Canadians.
Core inflation is likely to turn heads at the Bank of Canada. The central bank’s preferred measures of core inflation rose at an average annual rate of 2.55 per cent in October, up from 2.35 per cent in September.
Investors are dialling back their expectations for the Bank of Canada, partly because of Tuesday’s results. Since June, the BoC has trimmed its benchmark interest rate on four occasions, taking it to 3.75 per cent from 5 per cent.
Traders now see a roughly 30-per-cent chance the BoC cuts rates by a half-point at the December decision, down from around 40 per cent before the CPI report, according to Bloomberg data. Statscan is releasing several major economic reports in the coming weeks, giving central bankers plenty of additional data to mull over.
Still, expectations around monetary policy have shifted abruptly in recent weeks, particularly in the United States. Federal Reserve chair Jerome Powell said last week that the U.S. central bank wasn’t in a rush to lower interest rates, and investors are pricing in just two or three cuts from the Fed by the fall of 2025.
President-elect Donald Trump has also floated policies – including universal tariffs on imports – that would put upward pressure on U.S. inflation, obviating the need for substantial rate cuts from the Fed.
A more cautious Fed is one of several reasons why the Canadian dollar has recently traded at four-year lows of around 71 US cents, with fixed-income investors shifting cash south of the border for better returns.