Annual Inflation Fall to 1.6% in September
The likelihood of a half-percentage point interest rate cut by the Bank of Canada increased on Tuesday after Statistics Canada reported that annual inflation fell to 1.6% in September.
Tu Nguyen, an economist at RSM Canada, had expected inflation to stay closer to the central bank’s 2% target, where it stood in August, for a few more months. However, the latest inflation data has shifted expectations, making a larger interest rate cut more likely.
Nguyen noted that while the Bank of Canada has typically implemented slow and steady 25-basis-point cuts, the drop in inflation raises the possibility of a 50-basis-point reduction.
The inflation report is the last major piece of economic data ahead of the Bank of Canada’s next interest rate decision on October 23, when it will also update its economic forecasts. This comes after stronger-than-expected job numbers for September, which showed the economy added 47,000 jobs, bringing the unemployment rate down to 6.5%.
Nguyen, however, cautioned that the job data has been volatile, and the September report appears to be an outlier rather than the norm.
Statistics Canada pointed to lower gasoline prices as the primary factor behind September’s decline in inflation. Gas prices fell 10.7% compared to last year. Excluding gasoline, inflation sat at 2.2%.
Royal Bank of Canada economist Claire Fan highlighted that shelter costs continue to rise faster than other parts of the consumer basket. While rent prices increased at a slower pace in September, they were still elevated, up 8.2% year-over-year. Mortgage interest costs, although lower than August’s 18.8% increase, were still up 16.7% compared to last year.
Food prices, particularly for fresh or frozen beef, edible fats, oils, and eggs, also outpaced general inflation. Food purchased from restaurants rose 3.5%, slightly above August’s 3.4% increase.
So far this year, the Bank of Canada has cut its key interest rate three times, bringing it down to 4.25%. Governor Tiff Macklem has indicated that more rate cuts are likely, but the pace and timing will depend on ongoing evaluations of the economic data. In September, Macklem signaled flexibility in adjusting the rate of cuts if needed.
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