October inflation expected to show mild bump up despite longer-term downward trend

The upcoming inflation data from Statistics Canada, set to be released on Tuesday, is expected to show a slight increase for October. However, economists note that the overall trend remains downward over the long term.

According to economists surveyed, the consumer price index (CPI) for October is predicted to be 1.9%, up from 1.6% in September, which was the lowest inflation rate since February 2021. The drop in gasoline prices was a key factor in September's low number, as oil briefly fell to US$65 per barrel. However, with oil prices rising above US$75 per barrel in October, gasoline prices are expected to contribute to the uptick.

“We expect the headline number to rise to around 2%, but just as it dropped to 1.6%, it’s mainly an energy-related shift,” said RBC economist Claire Fan.

The expected inflation increase is largely due to changes in last year’s comparison figures, so it shouldn't be interpreted as a reversal of progress in lowering inflation, according to Fan. “The broader trend is still one of easing inflationary pressures,” she emphasized.

Excluding the more volatile sectors of energy and food, which are anticipated to stay steady at 2.8%, core inflation is expected to fall slightly to 2.2% from 2.4% in September.

BMO Capital Markets forecasts a headline inflation rate of 1.9% and core inflation around 2.4% to 2.5%. Benjamin Reitzes, managing director of Canadian rates & macro strategy, noted that October is likely to be a brief setback in the broader downward inflation trend. He attributed the modest increase to base effects and predicted a slight acceleration in both headline and core inflation.

Alongside the increase in gasoline prices, rising property taxes are expected to play a significant role in the inflation rise. While higher taxes will push up shelter costs, these increases will be partially offset by a smaller rise in mortgage interest rates following the Bank of Canada’s rate cuts in October.

Fan noted that while high mortgage payments have been contributing to shelter inflation, the recent decline in interest rates should begin to ease this pressure. “On a month-to-month basis, we’re very close to an inflection point,” she said.

In October, the Bank of Canada reduced its key interest rate by 0.5% to 3.75%, marking the fourth rate cut since June.

On the housing front, Desjardins economist Maëlle Boulais-Préseault reported that rental inflation averaged 8.3% in the third quarter, the highest rate since the 1980s. In contrast, the price growth for owned accommodation slowed to 5.5% due to falling borrowing costs. While rent inflation is expected to decelerate, Boulais-Préseault does not anticipate a rapid decline. “We expect rent inflation to slow over the next few years, in line with a rising unemployment rate and slower population growth,” she said.

The softening labor market is also expected to reduce inflationary pressure, according to Fan.

In contrast, inflation in the U.S. rose 2.6% in October, up from 2.4% in September, driven by increased government spending and a strong labor market, which have made inflation reductions more difficult. This divergence between the U.S. and Canada is also reflected in GDP per capita, which is 3% lower in Canada compared to pre-pandemic levels, while it has risen 8% in the U.S. As the economies of the two countries diverge, the Canadian dollar has weakened, trading at levels not seen since 2020.

Given the weaker Canadian dollar, a potential upward revision of GDP, and the slight inflation increase in October, BMO's Reitzes predicts the Bank of Canada will likely opt for a modest quarter-point rate cut at its December 11 meeting.

RBC, however, is anticipating another half-point cut due to the sluggish economy and the delayed impact of rate changes. “Given the current economic weakness and the time it takes for rate cuts to affect the economy, the Bank of Canada may want to act quickly to support growth,” said Fan. “They’re likely to front-load any easing if they think the economy needs it.”