There’s some reason for optimism embedded in Canada’s October inflation report. But you have to look pretty hard.
And there’s no particular reason to think the people at the Bank of Canada who are doing the looking are glass-half-full types.
Statistics Canada’s consumer price index (CPI) report on Wednesday showed a year-over-year inflation rate of 6.9 per cent, unchanged from September. From the perspective of some economists, this was a win; they had feared that inflation would actually tick higher for the month, amid a resurgence in fuel costs. Notably, the pace of food inflation – the bane of many Canadian households in recent months – eased a bit from its September highs.
But for the many Canadians of all walks of life anxiously awaiting evidence of progress in the Bank of Canada’s battle against inflation – something, even, that might compel the central bank to call a ceasefire in its interest-rate increases – the report offered precious little. The quest to tame inflation stalled last month.
Crucially, the Bank of Canada’s preferred measures of core inflation – the ones designed to look past short-term gyrations in a few corners of the CPI, to shed light on the state of broader, economy-wide price pressures – actually inched a bit higher in October. They’re hovering around 5 per cent, and haven’t changed much since July.
Even if you look at what CPI has done over the past three months, a measure that a growing number of economists have been focusing on, the pace inched up in October after slowing steadily since spring. Seasonally adjusted three-month inflation ran at a little over 4 per cent, annualized, last month. That’s an awful lot better than we were looking at a few months ago, but still fully double the Bank of Canada’s 2-per-cent target.
There’s no question that October’s numbers were bent out of shape by a one-month spike of 9 per cent in the price of gasoline. And the overall inflation rate didn’t rise despite the surge in fuel costs, itself an indication of generally softer price pressures elsewhere across the CPI. Excluding food and energy – the two components of CPI most prone to short-term price gyrations, and the biggest drivers of inflation this year – the rest of the index was up a tame 0.2 per cent month over month.
With those gasoline prices having already reversed much of their October gains, there’s every reason to expect that the inflation rate has returned to its downward path this month.
Nevertheless, the overall impression that the CPI data leaves is one of an inflation fight that has moved into a new stage.
There’s no question that the figures show a significant slowing of inflationary forces since the spring, and that the Bank of Canada’s rapid interest-rate increases are having a noticeable effect.
But, by the same token, a lot of the low-hanging fruit in cooling inflation has already been picked. We’re witnessing the impact of much higher interest rates on the consumer segments most directly sensitive to rate changes: residential real estate and big-ticket durable goods, where consumers lean heavily on credit for their purchases. That stuff was a slam dunk for central bankers. And we’ve had the good fortune that global commodity prices have retreated from their highs.
But we’re still waiting for the bigger, broader and more meaningful downward pressures from the central bank’s rate strategy to truly take hold. It’s going to take a while before we see higher rates dig in across the entire economy, in the form of slower demand and a weaker labour market. Those things are likely to emerge more gradually, unevenly and unpredictably than the initial impact on rate-sensitive sectors.
This is pretty much what Bank of Canada Governor Tiff Macklem has been saying. It’s his justification for maintaining that inflationary pressures remain too prevalent, and that interest rates must move still higher from the bank’s current 3.75 per cent. He has consistently played down even the most upbeat of inflation reports in recent months. The October numbers, with their sideways drift and continued elevated core inflation indicators, will have only firmed the governor’s stance.
The central bank did not comment on Wednesday’s inflation report. But its past comments suggest that it needs to see more concrete evidence of at least the beginnings of a broader easing of price pressures to feel comfortable that it has raised rates high enough.
It certainly won’t get that evidence from inflation data before the next rate setting on Dec. 7, at which the bank is locked into another increase of at least one-quarter percentage point. Statscan’s CPI report for November won’t come out until two weeks after that decision.
But significantly, the central bank will have both the November and December inflation reports in hand to inform its Jan. 25 rate decision, which could go a long way to determining what the bank does next. If those two reports show what the bank is looking for – which is to say, a lot more than the middling October data – then it might have enough confidence to declare an end to its rate hikes.
Without that evidence, a change in policy direction would be quite the leap of faith.