October inflation a 'disappointment' for the Bank of Canada ahead of December rate decision

Canada's annual inflation rate rose to 2.0% in October, exceeding expectations, but the stronger-than-anticipated data has not fully convinced economists that the Bank of Canada will implement another significant interest rate cut in December.

According to Statistics Canada, the Consumer Price Index (CPI) increased to 2.0% in October, up from 1.6% in September. The rise was partly due to base-year effects on gasoline prices. Economists had predicted a 1.9% increase for the month, based on data from LSEG Analytics.

Core inflation measures, which are closely watched by the Bank of Canada, also showed slight acceleration in October. The CPI-median increased from 2.1% in September to 2.2%, and CPI-trim rose from 2.4% to 2.6%.

"This report is disappointing for the Bank of Canada, but it follows a series of reports showing more progress than expected," said Katherine Judge of CIBC Economics. "We expect to see confirmation of slack in the Canadian economy in upcoming labor market and GDP reports, so we are still forecasting a 50 basis point rate cut in December for now."

Despite the October inflation data being higher than expected, Randall Bartlett, senior director of Canadian Economics at Desjardins, maintained his prediction of a 25 basis point rate reduction in December from the Bank of Canada.

"Governor Macklem made it clear in October that base effects—low month-over-month price growth last year pushing up current year-over-year figures—would keep inflation elevated around the turn of the year," Bartlett explained. "We believe the Bank will look past any short-term uptick in price growth, as inflation has remained at or below target and economic growth has been slower than expected."

The Bank of Canada is set to announce its next rate decision on December 11. Governor Tiff Macklem previously assured Canadians that they could "breathe a sigh of relief" and would not face significant changes in their cost of living. The central bank has cut rates four times since June in an effort to curb inflation.

BMO's chief economist Doug Porter and TD Economics' senior economist James Orlando both forecast a 25 basis point cut next month, calling the higher-than-expected CPI report a "minor setback" and "no big surprise."

Derek Holt, vice president of Scotiabank Economics, also expects a 25 basis point cut in December, although he noted that the decision could change based on upcoming GDP and employment data.

On a monthly basis, CPI increased by 0.4% in October, with a seasonally adjusted increase of 0.3%. Statistics Canada reported that prices rose at a faster rate in all provinces in October compared to September.

Gasoline prices fell by 4.0% in October, a smaller decline than the 10.7% drop in September. The smaller drop is partly attributed to a base-year effect, as prices had fallen 6.4% in October 2023 due to lower refining margins and weaker global oil consumption.

Grocery prices continued to outpace overall inflation, rising 2.7% year-over-year in October, up from a 2.4% increase in September. Fresh vegetables saw a larger price increase, while the rise in fresh and frozen beef prices slowed.

"This is the third consecutive month that grocery price growth has outpaced overall inflation," said Statistics Canada.

Consumers are increasingly opting for discount brands and private-label products, as well as seeking sales, according to RBC Capital Markets analyst Irene Nattel. "Value-oriented consumer behavior is likely to continue, as three-year stacked grocery inflation exceeds 20%, combined with rising shelter costs, which are putting pressure on household budgets," she noted.

Rent prices, though rising more slowly, remained high, with an annual increase of 7.3% in October, down from 8.2% in September. The smallest rent increases were observed in Nova Scotia and Manitoba.

"Although slowing, rent prices continue to rise and remain elevated," said Statistics Canada, noting that rents have increased 21.6% compared to October 2021.

Interest paid on mortgages has also slowed year-over-year since September 2023, following a peak in August.

Overall, the shelter category, which includes rent, home repairs, and other housing costs, saw a price increase of 4.8% year-over-year in October, down from 5.0% in September.

Property taxes also saw significant increases in October, with the largest rise in property taxes and special charges since 1992. Costs in this category rose across all provinces in 2024 compared to 2023, with the biggest increases in Newfoundland and Labrador (9.7%) and British Columbia (8%).