Canada’s inflation report for October will be in the spotlight on Tuesday after falling below the Bank of Canada’s 2% target for the first time since 2021 in September.
Headline inflation likely edged back to 2% from a smaller annual decline in energy prices (-2.8% vs. -8.3% in September). Meanwhile, food price growth likely held steady (2.8% year-over-year in September). Excluding these two volatile components, we look for consumer price index growth to tick lower to 2.2% from 2.4%.
We expect some upward seasonal price moves in categories like clothing and footwear as well as travel tours. Another component to watch for is property taxes and other special charges as this component is released only in October. Last year, it rose by 4.9% month-over-month, and we expect another large increase this year, given major Canadian cities had tax hikes in 2024.
The BoC‘s preferred median and trim core measures (for a better gauge of where inflation is going rather than where it’s been) both likely ticked higher in October on a three-month rolling average. However, they should remain “below 2 ½%” as referenced in the policy statement from the BoC’s October interest rate cut.
We continue to think that inflation is more likely to drift broadly lower in Canada. With a headline inflation forecast of 2% in October, inflation will have hovered around the 2% target for three consecutive months. The diffusion index has also suggested that the breadth of inflation pressures narrowed recently. Meanwhile, labour markets continue to soften with hiring demand (job openings) slowing and the unemployment rate continuing to edge higher. Given the Canadian economy’s weak momentum, we continue to expect the BoC to cut the overnight rate by an additional 50 basis points in December.
Week ahead data watch
- Canadian retail sales likely rose 0.4% in September—the same rate as last month. Core sales likely contributed to most of the headline growth, given auto sales and sales at gas stations declined during the month.
- We expect housing starts at 256,000 in October, up from 224,000 in September.
