Consumer price inflation cooled to 3.1% in October on a year-on-year (y/y) basis, down from 3.8% in September. That is progress, but inflation is still above the 2.8% low reached last spring, prior to the uptick in energy prices.
Cooler inflation was largely due to lower prices for gasoline (-6.4% month-on-month (m/m)).
Inflation at the grocery store was very slightly cooler at 5.4% y/y (vs. 5.8% in September). However, slower growth in prices may be imperceptible to consumers who are still paying more than 20% more for a basket of groceries relative to three years ago – the biggest such increase in 40 years.
Inflation on the goods side continues to cool, with core goods prices up 1.7% y/y in October. Durable goods inflation has cooled to only 0.3% y/y, helped by softer price increases for vehicle purchases and outright deflation in furniture and appliances prices.
Services prices, on the other hand, continue to present a challenge to a cooler inflation picture. Services inflation picked up to 4.6% y/y in October (vs. 3.9% in September), on higher prices for travel tours, rent and property taxes and other special charges. Rent inflation picked up to 8.2% y/y from 7.3% in September. After years of smaller increases through the pandemic, municipalities across Canada hiked property taxes and other special charges 4.9% y/y, the largest such increase since 1992.
There was improvement in the Bank of Canada’s underlying inflation measures. CPI-trim fell two-tenths to 3.5% in September and CPI-median dropped by three tenths to 3.6% y/y in September.
Key Implications
It is encouraging to see another leg down in CPI inflation in October, but the Bank of Canada will likely need to see further progress on core inflation before it feels confident that inflation is headed back to the 2% target. There is little doubt that Canada’s economy has cooled in recent months, but the chill in inflation that should follow is proving slow to show up. We expect weaker demand in the economy will ultimately dampen price pressures, but given tightness in the labour market, it will take time.
This presents a communication challenge for the Bank of Canada. The objective of monetary policy in Canada is to keep inflation “low and stable” and progress on meeting its target has been slow despite aggressive rate increases. Fortunately, we won’t need to wait long to get the Bank’s latest thinking on inflation, with Governor Macklem slated to speak on “The Cost of High Inflation” tomorrow in Saint John. We’d expect the Governor to emphasize for Canadians why the Bank is laser focused on wrestling inflation back to target, even though the process is painful.
