Canada’s inflation rate falls to 1.6% in September, raising odds of larger BoC rate cut

11:30 a.m

What’s next

All eyes are on the Bank of Canada, which makes its next interest rate announcement on Oct. 23.

After the inflation report, investors are leaning more heavily toward a half-point rate cut and a further 25 basis points of easing by the end of the year. (A basis point is 1/100th of a percentage point.) If that scenario plays out, the Bank of Canada’s policy rate will reach 3.5 per cent by December, with plenty of additional cuts to come in 2025.

The monetary policy easing cycle will be cheered by holders of variable rate mortgages, along with people priced out of homeownership at current mortgage rates – provided that home prices don’t accelerate as borrowing rates decline.

– Matt Lundy

10:17 a.m

Here’s a list of September inflation rates for selected Canadian cities

Canada’s annual inflation rate was 1.6 per cent in September, Statistics Canada says. The agency also released rates for major cities, but cautioned that figures may have fluctuated widely because they are based on small statistical samples (previous month in brackets):

• St. John’s, N.L.: 1.1 per cent (1.7)
• Charlottetown-Summerside: 1.4 per cent (1.6)
• Halifax: 1.2 per cent (1.5)
• Saint John, N.B.: 0.8 per cent (2.3)
• Quebec City: 1.2 per cent (1.4)
• Montreal: 1.8 per cent (1.8)
• Ottawa: 2.4 per cent (2.4)
• Toronto: 2.4 per cent (2.7)
• Thunder Bay, Ont.: 2.3 per cent (1.7)
• Winnipeg: 0.9 per cent (1.1)
• Regina: 0.8 per cent (1.0)
• Saskatoon: 0.8 per cent (1.5)
• Edmonton: 1.8 per cent (1.7)
• Calgary: 2.1 per cent (2.3)
• Vancouver: 1.7 per cent (2.2)
• Victoria: 1.9 per cent (2.4)
• Whitehorse: 1.8 per cent (1.4)
• Yellowknife: 1.2 per cent (1.1)
• Iqaluit: 1.5 per cent (1.2)

– The Canadian Press

10:12 a.m

Here’s a list of September inflation rates for Canadian provinces

Canada’s annual inflation rate was 1.6 per cent in September, Statistics Canada says. Here’s what happened in the provinces (previous month in brackets):

• Newfoundland and Labrador: 0.7 per cent (1.3)
• Prince Edward Island: 1.0 per cent (1.2)
• Nova Scotia: 0.9 per cent (1.2)
• New Brunswick: 0.9 per cent (1.8)
• Quebec: 1.3 per cent (1.5)
• Ontario: 1.9 per cent (2.1)
• Manitoba: 0.8 per cent (1.3)
• Saskatchewan: 0.7 per cent (1.1)
• Alberta: 1.9 per cent (2.0)
• British Columbia: 2.0 per cent (2.4)

– The Canadian Press

9:58 a.m

Inflation undershoot bolsters case for larger BoC rate cut

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For the past three years, the Bank of Canada’s sole focus has been bringing inflation to heel. Now that price pressures are largely under control, policy makers are getting concerned about inflation falling too much and getting stuck below the central bank’s 2-per-cent target.

The surprisingly slow inflation reading for September likely adds to those concerns and strengthens the case for a larger half-percentage-point rate cut on Oct. 23. Financial markets now put the odds of this happening at around 70 per cent, up from 50 per cent before the latest inflation numbers.

The Bank of Canada has cut interest rates by a quarter-percentage-point three consecutive times since June. But at 4.25 per cent, the bank’s benchmark policy rate remains at least a percentage point above what bank economists consider to be a neutral level. That means borrowing costs – interest rates on mortgages and other loans – are still weighing on consumer spending and business investment.

With headline inflation running below 2 per cent and the Canadian economy struggling to grow, such a restrictive monetary policy stance no longer looks appropriate.

Governor Tiff Macklem has said in recent appearances that he’s open to a 50-basis-point move if inflation and economic growth come in weaker than expected.

Recent data have been mixed. Canadian GDP growth beat expectations in July, but appears to have slowed over the back half of the summer. The latest labour force survey numbers, published Friday, showed more job creation than expected, but a pair of Bank of Canada surveys published the same day showed Canadian business and consumer sentiment remains dour.

The September inflation data will likely be the deciding factor in the quarter-point versus half-point rate-cut debate. Much of the drop in CPI inflation was driven by falling gasoline prices, which can be volatile and are often overlooked by the central bank. But price pressures looked fairly mild across the board and measures of core inflation, which strip out the most volatile prices, continued to ease on a three-month basis.

For central bankers nervous about undershooting the target, the case for picking up the pace of monetary easing seems to be clear.

– Mark Rendell

9:52 a.m

How economists are reacting to the September inflation report

Here’s how economists are reacting:

Douglas Porter, chief economist, BMO Capital Markets

Sliding energy prices were the big driver here, as core price inflation was largely as expected and essentially stable. Still, the long-awaited drop in headline CPI to below 2 per cent is a watershed moment, which will help calm down inflation expectations. While gasoline will likely pop back up in next month’s report, some of the hottest components of shelter costs are relenting and will act as an undertow on overall inflation in coming months. It’s a close call, but we suspect that the big improvement in inflation, the still-high unemployment rate, and the still-sour consumer and business sentiment will be enough to prompt the Bank of Canada to opt for a 50 bp rate cut later this month. After all, the BoC has dovishly signalled that they are now more concerned about downside risks to the economy and the possibility that inflation may drop too low.

Royce Mendes, managing director and head of macro strategy, Desjardins Securities

With the share of components growing faster than 3 per cent per year at just 30 per cent, breadth indicators continue to suggest weakness across a range of categories. And that’s despite the fact that shelter inflation continues to run at an annual pace of 5.0 per cent.

Core inflation measures didn’t move on a year-over-year basis, but three-month annualized rates slowed. The Bank of Canada’s core median and trimmed mean indicators averaged 2.35 per cent for the second consecutive month. That said, the three-month annualized rates decelerated to 2.11 per cent from 2.31 per cent in August. Moreover, the three-month annualized rate of core services excluding shelter cooled to just 1.91 per cent from 2.26 per cent. These readings suggest weakness in recent trends and confirm that inflation is now at risk of falling below the Bank of Canada’s target.

Headline inflation is likely to bounce higher next month, but could still remain below 2.0 per cent. Given the weakness in the economy, it’s clear that our 50 basis point rate cut call will become the consensus. The Bank of Canada needs to do something to revive the economy and stop inflation from falling too far. Our view is that a 50 basis point rate cut is the right dose of medicine.

James Orlando, director and senior economist, TD Economics

With headline inflation now decisively below the Bank of Canada’s (BoC’s) target and core inflation looking likely to follow, inflation risks have eroded over the last few months. Below the surface, this trend looks to continue with housing costs finally starting to subside, with inflation excluding shelter running at a paltry 0.4 per cent y/y. All in, the inflation outlook is looking a bit softer than we expected in our recently published forecast.

The BoC is scheduled to meet next week and debate over whether the central bank will go big with a 50 basis point cut is rising. Thus far, the bank has been predictable, with a steady streak of 25 bp cuts over the last three meetings. Given the persistent strength of the jobs market, the BoC would be validated in maintaining its steady rate cutting pace. On the other side, market participants are increasingly betting on a 50 bp cut, assuming that the BoC will focus on the downside risks now that headline inflation has moved closer to the bottom end of its target range. Either way, it will be a close call for the BoC next week.

Stephen Brown, deputy chief North America economist, Capital Economics

The large downside surprise to headline inflation in September and muted monthly gains in the CPI-trim and CPI-median core measures support our view that the Bank of Canada will choose a more aggressive 50bp cut at its meeting next week.

The fall in headline inflation to 1.6 per cent left it below the consensus estimate of 1.8 per cent and our own forecast of 1.7 per cent. The fall in inflation owed a lot to the 7.1 per cent m/m drop in gasoline prices and favourable base effects, but there were also encouraging disinflationary signs elsewhere that explain the downside surprise, with shelter prices rising by just 0.1 per cent m/m in seasonally adjusted terms, the smallest gain in almost two years. … With the activity data also pointing to much weaker third-quarter GDP growth than the Bank anticipated, the totality of the data should be enough to persuade the Bank to cut by a larger 50bp next week.

Read the full roundup of economist and market reaction.

– Darcy Keith

9:23 a.m

Inflation highlights: Canadians see rent costs, grocery prices rise

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Here are some highlights from Tuesday’s report:

• Inflation is coming in much weaker than the Bank of Canada projected in July. Average CPI growth in the third quarter was 2 per cent, versus the BoC’s forecast of 2.3 per cent. Likewise, the central bank’s preferred measures of core inflation – which strip out volatile price movements – came in a touch lower than estimated.
• The rate of price growth is settling back to normal levels. But as Statscan said in its report, consumer prices are much higher than just a few years ago. Over all, the CPI has risen 12.7 per cent over the past three years. The increases have been especially steep for essentials such as rent (21 per cent) and groceries (20.7 per cent).
• Rent is showing tentative signs of moderation. Those costs rose 8.2 per cent in September on an annual basis, down from 8.9 per cent in August. While a deceleration is starting to take root, these increases are still very large by historical standards.
• Some bespoke measures of inflation are showing weak price gains. For example, the CPI excluding mortgage interest costs has risen 1 per cent over the past year. When all housing costs are excluded, consumer prices have risen by only 0.4 per cent.
• Grocery prices rose 2.4 per cent, year-over-year, matching the pace in August. Statscan noted that it was the second consecutive month that price gains for groceries outpaced overall inflation.

– Matt Lundy

9:10 a.m

Analysis: Overall inflation has fallen into the ‘who cares’ zone, but food and shelter are still running hot

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The overall inflation rate has fallen into the “who cares” zone.

A year-over-year increase of 1.6 per cent in prices? Back in the day, when inflation readings like this were normal, the cost of living was a topic of conversation at exactly zero gatherings of family and friends.

Here’s the problem with inflation, though. It’s still running a bit hot in two areas – food and shelter. Nothing important, right?

Shelter inflation came in at 5 per cent, food at 2.8 per cent. If you’re not feeling better about how your finances are holding together in the final quarter of 2024, those are two key reasons. Here’s another: Slow inflation is still inflation. While a 1.6-per-cent increase in prices compared with September, 2023, may be statistically mild, it feels like piling on after the cumulative inflation of the past few years.

Statistics Canada said rents are 21 per cent higher compared with three years ago, which is a staggering number for the financially precarious people who are numerous in the population of renters. Grocery store prices are up 20.7 per cent in the past three years, a number that some people see as underselling what’s happened to the cost of buying groceries.

Here’s one more reason why weakening inflation doesn’t feel so great: When price increases taper down to levels like we saw in September, it’s an indication of a slowing economy. We’ve so far avoided recession, but the unemployment rate has risen this year and the latest retail spending numbers showed just a mild increase.

One positive that offers hope for people who feel overwhelmed by inflation: The latest numbers in the job market show average hourly wages were up 4.6 per cent on a year-over-year basis, following a 5-per-cent rise in August. These above-inflation wage hikes won’t last, but for now they are helping people get the upper hand on rising prices.

– Rob Carrick

8:55 a.m

Market bets for the next BoC rate move shift in the wake of September inflation report

Money markets are back to giving much higher odds to a large 50-basis-point rate cut by the Bank of Canada at its next policy meeting following the weaker-than-expected headline inflation reading this morning.

Implied probabilities in overnight swaps markets, which capture market bets on where monetary policy is heading, are now giving about 67 per cent odds of a 50-basis point cut on Oct. 23. A smaller, 25-basis-point cut is now being given odds of 33 per cent. Prior to this morning’s inflation data, markets were putting 50/50 odds of whether it will be a larger or smaller cut.

Markets are now fully pricing in a total of 75 basis points worth of monetary easing by the end of this year.

The Canadian dollar immediately lost ground after the 8:30 a.m. data release, falling just over one-10th of a U.S. cent to about 72.30 US cents. The Canadian two-year bond yield fell five basis points on the data, to 3.018 per cent.

– Darcy Keith

8:48 a.m

The new inflation numbers

Canada’s inflation rate dropped below 2 per cent for the first time in more than three years, the latest sign of fading price pressures after the worst spell of inflation in four decades.

The Consumer Price Index (CPI) rose at an annual rate of 1.6 per cent in September, down from a 2-per-cent pace in August, Statistics Canada said in a report. Financial analysts were expecting a slowdown to 1.8 per cent. This was the weakest inflation rate since February, 2021.

The results were largely driven by a decline in gasoline prices, which fell 7.1 per cent in September from August. Excluding gas, the CPI rose 2.2 per cent in September, year over year, matching the increase in August.

Tuesday’s inflation report is the last major economic release before the Bank of Canada’s next interest rate decision on Oct. 23. Before the CPI report, investors were split over whether the central bank will cut rates by a quarter-percentage-point or a half-point next week.

In recent months, the Bank of Canada has warned that inflation could drift below the bank’s 2-per-cent target. While the BoC is unlikely to be alarmed by one month of below-target inflation – especially when the results are heavily influenced by volatile gas prices – it stressed that economic activity needs to pick up.

Statscan reported on Friday that employment rose by nearly 47,000 in September – nearly double analyst estimates – and the unemployment rate ticked lower for the first time since January.

– Matt Lundy

8:30 a.m

Canada’s inflation rate eased to 1.6% in September: Statscan

Canada’s annual inflation rate hit 1.6 per cent in September, down from 2 per cent in August, according to Statistics Canada figures published Tuesday. The result was much lower than the consensus estimate of 1.8 per cent.

– Matt Lundy

7:45 a.m

U.S. inflation cooled less than expected in September

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U.S. inflation continued to tick lower last month, but not as quickly as Wall Street expected, decreasing the odds of another oversized interest rate cut from the Federal Reserve in November.

Annual consumer price index inflation in the United States fell to 2.4 per cent in September from 2.5 per cent the month before, the Bureau of Labor Statistics reported last week. However, this drop was smaller than analysts were forecasting, and measures of core inflation accelerated slightly.

Inflation has been stickier in the U.S. than in Canada, given the relative strength of the American economy and its resilience in the face of high interest rates. Canada’s more housing-oriented and interest-rate-sensitive economy has slowed much more rapidly, weighing on inflation.

The latest U.S. inflation data could influence things on this side of the border. The Fed’s larger-than-expected half-percentage-point rate cut last month was seen as opening the door for the Bank of Canada to follow suit with its own half-point move. If the Fed shifts back to a more hawkish position, that could influence how the BoC approaches its next rate decision on Oct. 23 – at least on the margin.

Stickier U.S. inflation also means higher U.S. bond yields, which influence bond yields in Canada. Interest rates on fixed-rate mortgages are based on bond yields, not the Bank of Canada’s policy rate. That means stubborn American inflation could push up mortgage rates on this side of the border, or at least prevent them from falling much further in the near-term.

– Mark Rendell

7 a.m.

September inflation report to be released today

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Canada is set for another soft inflation report – and the numbers may come in lower than the Bank of Canada’s 2-per-cent target.

After the annual inflation rate hit 2 per cent in August – the lowest reading in more than three years – financial analysts are expecting similar results in the September report, which Statistics Canada will publish on Tuesday morning. The median estimate on Bay Street is that annual Consumer Price Index growth will ebb to 1.8 per cent.

Inflation has generally come in lower than expected this year. Weaker consumer spending, more resilient supply chains and lower gasoline prices have all helped to curb inflationary pressures in the economy.

Because of this progress, the Bank of Canada started to cut interest rates this summer, and over three decisions the central bank has lowered its policy rate to 4.25 per cent from 5 per cent.

In recent months, the bank has expressed concerns that inflation could undershoot its 2-per-cent target on the way down, saying the Canadian economy needs to pick up speed to absorb slack.

On Friday, Statscan reported that employment increased by nearly 47,000 in September and the unemployment rate fell to 6.5 per cent from 6.6 per cent – both results better than analyst estimates.

But other aspects of the jobs report were less encouraging. For example, the total number of hours worked across the economy fell 0.4 per cent last month, and the employment rate is steadily dropping.

Financial markets are split over whether the Bank of Canada will deliver a half-point interest rate cut at its next meeting on Oct. 23. A larger reduction would bring the bank’s benchmark rate to 3.75 per cent.

The Federal Reserve kicked off its rate-cut campaign in September with a half-point move, but that’s unlikely to be repeated in November, given some strong U.S. economic data of late.

Bank of Canada Governor Tiff Macklem has said that inflation could rise in the months ahead, although the central bank is expecting a sustainable return to the 2-per-cent target next year.

CIBC Capital Markets is predicting inflation will dwindle to 1.7 per cent in Tuesday’s report, largely because of lower gas prices in September.

“With gasoline prices up modestly so far in October, inflation may reaccelerate slightly ahead and as a result September’s print could mark the low point in inflation for the year,” Andrew Grantham, senior economist at CIBC, said in a report. “However, we continue to believe that there is ample spare capacity within the Canadian economy so, unless growth recovers quicker than we think, inflation could fall further below the 2-per-cent target during certain points in 2025.”

– Matt Lundy