Canada's annual inflation rate cooled to 2.2 per cent in October, bringing it closer to the Bank of Canada's two per cent target. Despite this positive headline number, underlying price pressures have economists widely anticipating that policymakers will hold the benchmark interest rate steady at their next announcement on December 10.
Economists Weigh In on the Inflation Data
The latest Consumer Price Index (CPI) report presented a complex picture for the central bank. While the overall dip was driven by lower gasoline and food prices, other key areas saw significant increases.
Douglas Porter, Chief Economist at the Bank of Montreal, described the data as "a tad on the disappointing side." He pointed out that rent, which he called the single biggest driver of inflation, accelerated to a 5.2 per cent year-over-year increase. Furthermore, telephone services recorded their largest yearly price jump since 1982.
Porter noted that a pullback in grocery prices offered some relief, potentially aided by the rollback of retaliatory tariffs. He characterized the report as "mildly friendly" on the surface but concluded that the underlying details are not strong enough to justify a rate cut, making a hold the most likely outcome.
A Deeper Look at the Core Measures
Abbey Xu, an economist at Royal Bank of Canada, labeled the inflation reading a "mixed bag" for the Bank of Canada. She highlighted that while median price growth was a modest 0.1 per cent, the three-month average remained above 2.5 per cent.
Xu attributed the persistent price pressures to resilient consumer demand. Given this backdrop and the Bank's recent indication that the overnight rate is "about the right level," she does not expect further interest rate reductions from the central bank in the near term.
Narrow Drivers Offer a Silver Lining
Stephen Brown, Deputy Chief North America Economist at Capital Economics, found encouraging signs in the report. He argued that the drivers of inflation in October were "concentrated in a narrow range of items," including local property taxes and recreation costs.
Brown suggested that this concentration supports the view that the Bank of Canada may be overestimating broader underlying inflation pressures. He speculated that the 0.4 per cent rise in recreation costs could be linked to the Toronto Blue Jays' memorable run to the World Series.
With the key interest rate decision looming, all eyes will be on the Bank of Canada's next move as it navigates the final stretch toward its inflation target.
