Headline CPI inflation eased in September to 1.6% year-on-year (y/y), below expectations for a 1.8% y/y print and less than the 2.0% y/y reading from August.
The deceleration was led by gasoline, which was down 10.7% y/y and 7.1% in September alone. Fears over weakening global economic growth have pulled down oil prices, which has fed through to cheaper prices at the pump.
Encouragingly, inflation in services has started to ease (4.0% y/y from 4.3% y/y in August). Shelter costs have been a big driver of services inflation, but with lower interest rates, mortgage interest cost inflation has decelerated (16.7% y/y from 18.8% y/y in August), while rent prices too are easing (8.2% y/y from 8.9% y/y in August). Another swing factor over the last few months has been the cost of air travel. With the end of the summer travel season, this category is starting to drop (-4.4% y/y).
The Bank of Canada’s preferred “core” inflation measures held firm at 2.4% y/y in September. On a three-month annualized basis, the average moved from 2.3% in August to 2.1% in September, essentially at the BoC’s target. This points to further easing in the core metrics in the months ahead.
Key Implications
With headline inflation now decisively below the Bank of Canada’s (BoC’s) target and core inflation looking likely to follow, inflation risks have eroded over the last few months. Below the surface, this trend looks to continue with housing costs finally starting to subside, with inflation excluding shelter running at a paltry 0.4% y/y. All in, the inflation outlook is looking a bit softer than we expected in our recently published forecast.
The BoC is scheduled to meet next week and debate over whether the central bank will go big with a 50 basis point cut is rising. Thus far, the bank has been predictable, with a steady streak of 25 bp cuts over the last three meetings. Given the persistent strength of the jobs market, the BoC would be validated in maintaining its steady rate cutting pace. On the other side, market participants are increasingly betting on a 50 bp cut, assuming that the BoC will focus on the downside risks now that headline inflation has moved closer to the bottom end of its target range. Either way, it will be a close call for the BoC next week.
 target and core inflation looking likely to follow, inflation risks have eroded over the last few months. Below the surface, this trend looks to continue with housing costs finally starting to subside, with inflation excluding shelter running at a paltry 0.4% y/y. All in, the inflation outlook is looking a bit softer than we expected in our recently published forecast.){kind=link}