October inflation expected to show mild bump up despite longer-term downward trend

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TORONTO – The latest inflation reading due Tuesday from Statistics Canada is expected to show a slight increase for October – but economists say the measure remains on a long-term downward trend.

Economists polled by Reuters expect the CPI to reach 1.9 percent for October, up from 1.6 percent in September, the lowest inflation reading since February 2021.

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The price of gasoline was a major reason for the drop in September’s number, with the price of oil falling to a low of around US$65 per barrel at one point. It is also expected to be a driver of the increase in October, when it reached US$75 per barrel.

“We expect the headline to come back to 2 percent, but just as it’s down to 1.6 percent, it’s mostly about the energy story,” RBC economist Claire Vann said.

She said the expected increase in inflation partly depended on shifts in last year’s baseline and should not be seen as a departure from progress in lowering the measure.

“The general story is that this lower inflation, or gradual easing of inflation pressure, is still very much the trend,” Fan said.

She added that excluding volatile energy and food measures – which Fan expects to remain steady at 2.8 percent – core inflation should fall to 2.2 percent in October from 2.4 percent in September.

BMO Capital Markets expects headline inflation to reach 1.9 per cent and core inflation at 2.4 or 2.5 per cent, Benjamin Ritzes, managing director of Canadian rates and macro strategist, said in a note.

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“October looks set to be a bump in the road to the downward trend in inflation. Prices did not exactly rise during the month, but base effects are challenging, suggesting headline and core inflation will accelerate modestly.

In addition to the slight increase in gasoline prices, higher property taxes are expected to be the main driver of this increase. Higher taxes will help raise shelter costs, but will be offset by a smaller increase in mortgage interest costs after the Bank of Canada cut interest rates again in October.

Rising mortgage payments due to interest rates and a wave of mortgage renewals have put upward pressure on housing inflation, but the downward trend in prices should begin to ease the pressure on housing inflation, Fan said.

“On a month-to-month basis, I think we are very close to the tipping point.”

The Bank of Canada cut its key interest rate by half a percentage point in October to 3.75 per cent, the fourth drop since June.

Regarding rents, Desjardins economist Mali-Bouillet Bresault said in a note last week that rent inflation averaged 8.3 percent in the third quarter, the highest pace since the 1980s.

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This contrasts with growth in owned home prices, which has slowed to 5.5 per cent as borrowing costs continue to fall, she said.

Rent inflation, which aims to measure what Canadians actually pay in rent rather than just the cost of new rentals, is expected to decline, but not in a hurry.

“Our expectations indicate a slowdown in the pace of rent inflation over the next few years, in line with the high unemployment rate and weak population growth,” said Boulet-Brisseault.

A slowdown in the labor market is also expected to help reduce pressure on inflation, Fan said.

This is in contrast to the United States, where inflation rose by 2.6 percent in October from a year earlier, compared to 2.4 percent in September, where higher government spending and a strong labor market make inflation reductions a challenge.

Fan said the two countries disagree on a range of key economic measures, including the widest spread of real per capita GDP ever. In Canada, this measure is three per cent lower than in 2019, while it is eight per cent higher in the United States.

As the two economies diverged, the Canadian dollar came under pressure, trading at its lowest levels since 2020.

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A weaker Canadian dollar, a potential upward revision to GDP, and a slight increase in inflation in October are all factors that have BMO’s Ritz forecasting the Bank of Canada will opt for a more moderate quarter-point cut in its key interest rate at its December 11 meeting.

However, RBC expects another half-point cut from the central bank, given the faltering economy and the time lag for the impact of interest rates.

“Given how weak current conditions are, and given the fact that even if you cut rates today, it won’t help matters until at least two quarters down the road, they really want to front-load any amount of easing.” Van said.

“If they think the economy needs support, they want to do it as quickly as possible.”

This report by The Canadian Press was first published Nov. 17, 2024.

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