October inflation is expected to show a mild bump despite the long-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 the month of October – but economists say the measure is still in a long-term downward trend.

Economists polled by Reuters expected the consumer price index to come in at 1.9 percent for October, up from 1.6 percent in September which was the lowest inflation reading since February 2021.

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Gasoline prices were the main reason September’s numbers were so low, as oil fell as low as $65 a barrel at one point. It is also expected to be a driver to increase in October, when it crested US $ 75 per barrel.

“We expect headlines to come back up to two percent, but how it went down to 1.6 percent is mostly an energy story,” RBC economist Claire Fan said.

The expected rise in inflation is partly based on changes in last year’s baseline and should not be seen as a departure from progress to reduce the pace, he said.

“The really broad story is low inflation, or progressively easing inflationary pressure, it’s still very much a trend,” Fan said.

Excluding volatile energy and food measures – which Fan expects to hold steady at 2.8 percent – core inflation should ease to 2.2 percent in October from 2.4 percent in September, he said.

BMO Capital Markets sees headline inflation coming in at 1.9 percent and core inflation at 2.4 or 2.5 percent, said Benjamin Reitzes, managing director of Canadian rates & macro strategist, in a note.

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“October is seen as a bump on the road to a downward trend in inflation. Prices do not exactly increase in the month, but the basic effect is challenging, indicating that headlines and core inflation will accelerate modestly.

Along with a mild increase in gasoline prices, he expects rising property taxes to be the main driver for the increase. Rising taxes will help push up shelter costs, but will be offset by a small increase in mortgage interest costs after the Bank of Canada cut interest rates again in October.

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

“On a monthly basis, I think, if anything, it’s very close to an inflection point.”

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

On the rental side, Desjardins economist Maelle Boulais-Preseault said in a note last week that rental inflation averaged 8.3 percent in the third quarter, the highest pace since the 1980s.

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That is in contrast to the growth in the price of owned accommodation, which fell to 5.5 percent as the cost of borrowing continued to fall, he said.

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

“Our outlook is for rent inflation to moderate over the next few years, in line with rising unemployment and weaker population growth,” Boulais-Preseault said.

The softening of the labor market is also expected to help reduce the pressure on inflation, said Fan.

That’s in contrast to the US, where inflation rose 2.6 percent in October from a year earlier, compared to 2.4 percent in September, as higher government spending and a strong labor market made reducing inflation a challenge.

The two countries differ on various key economic measures, including real GDP per capita which is the most widespread on record, Fan said. In Canada, the measure was three percent below that in 2019, while it was eight percent higher in the US.

While the two economies diverged, the Canadian dollar came under pressure, trading at the lowest level not seen since 2020.

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Weak Loonie, can revise up the GDP, and a slight increase in October inflation all leads BMO’s Reitzes to expect the Bank of Canada to vote for a quarter-percentage-point mild cut in the key rate at the December 11 meeting.

But RBC expects another half-point cut from the central bank, as the struggling economy and delays to rates take a toll.

“Given the current weak situation, and the fact that even if you cut rates now, it’s not going to help things until at least a few quarters down the road, they really want to open up a lot of easing,” Fan said.

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

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

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