Fundamental Analysis

Inflation Cools in Canada in October Alongside Prices at the Pumps

Typography

Consumer price inflation dropped back to 1.4% year-on-year in October (from 1.6% in September), on par with expectations. Month-on-month seasonally-adjusted prices rose 0.2%.

A deceleration in gasoline prices, following hurricane-related run-ups in September and August, was the main factor softening inflation. Gasoline prices were up 6.5% (y/y) in October, down from the 14.1% advance in September. Excluding gasoline, inflation rose to 1.3% (from 1.1% in September).

Food and beverage prices fell 0.2% month-on-month in October (seasonally adjusted) and decelerated to 1.3% year-on-year (from 1.4%).

Core prices were mixed according to the Bank of Canada's preferred measures. CPI-median ticked down to 1.7% (y/y) from 1.8% previously, while CPI-common ticked up to 1.6%. CPI-trim was unchanged at 1.5%. Excluding food and energy, inflation rose to 1.4% (from 1.2%).

Key Implications

Energy price volatility aside, there isn't much to report on the inflation front. As in the U.S., there appears to be some idiosyncratic factors, such as lower cell phone plans, weighing on overall price growth.

The past run-up in the Canadian dollar through the summer months to a peak of 82 cents U.S. in early September has also contributed to the recent softness. Its reversal in the weeks since means this slowdown should prove fleeting.

Indeed, there is good reason to think inflation will soon turn a corner. Wage growth has accelerated notably in recent months and job growth has been concentrated in full-time positions. Alongside a lower Canadian dollar and more stable energy prices, this should set the stage for inflation to move toward 2% over the next year.

Author: TD Bank Financial Group Website: http://www.td.com/economics/
TD Bank Financial Group
The information contained in this report has been prepared for the information of our customers by TD Bank Financial Group. The information has been drawn from sources believed to be reliable, but the accuracy or completeness of the information is not guaranteed, nor in providing it does TD Bank Financial Group assume any responsibility or liability.
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