Canadian Rate Hikes Unlikely As Inflation & The Economy Slows

The Canadian economy is slowing and that’s helping to moderate price growth. Statistics Canada (Stat Can) data shows the Consumer Price Index (CPI) decelerated in September 2023. Inflation remains elevated but it’s still slowing down. That’s good news for those fearing rate hikes, but slowing demand and fading economic growth is still far from good news.  

Canadian Inflation Is Slowing Faster Than Expected

Canadian headline inflation decelerated more than expected. Annual growth fell to 3.8% in September, falling 0.2 points from the previous month. Much lower growth than the 0.1 point increase in the consensus estimate. 

Seasonally adjusted growth climbed 0.2 points, but that trend appears to be downplayed by Stat Can. The accuracy of post-recession seasonal adjustments is difficult to gauge, so sticking to unadjusted annual growth may be better anyway. 

The rate is still significantly higher than the target rate, but there’s signs of cooling. A base effect in gasoline helped to boost the annual growth, but it was mild from a historical standpoint. Stat Can notes that airfare (-21.1%) played a big role in bringing the basket lower. As did groceries (+5.8%), which are still significantly above target, but much lower than the 6.9% annual growth a month before.  

Canadian CPI To Slow Further Due To A Base Effect

The base effect issue was part of the reason the Bank of Canada (BoC) raised rates later than needed. Now we’re on the other side of a similar base effect, helping to lower the rate. This morning, BMO Capital Markets made it a key point in their analysis to investors.  

 “Before getting to the details, note that next month has a very favorable base effect for headline inflation (not quite as much for core), as CPI surged 0.7% in October 2022,” said Benjamin Reitzes, the institution’s Canadian Rate & Macro Strategist.  

Reitzes further explained, “Gasoline prices are down about 7% so far this month, so assuming there isn’t a sharp reversal in the next two weeks, we could get a big deceleration in Oct CPI (into the low-3% range).”

Bank of Canada Unlikely To Raise Rates, But It’s Not Good News

Making sense of a base effect is difficult and won’t be crystal clear until viewed in hindsight. However, one thing most people can agree on is the BoC is unlikely to see the economy as strong enough to pursue higher rates.  

BMO says inflation is still elevated but they don’t see a rate hike from the central bank. They see yesterday’s weak Business Outlook Survey (BOS) followed by today’s CPI report presenting a concern the economy is slowing too much. 

“The level of inflation remains much too high for comfort, but the trend is the BoC’s friend here. Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure…there’s no need for further rate hikes in Canada.”



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  • dave frazer 8 months ago

    The bond market is in charge, not the Bank of Canada, The bond rates are going up and the bond market is the base for are all interest rates

    • Gorlash Witherspoon 8 months ago

      They are talking about the funds rate, not setting mortgage rates. Also you are incorrect as the bond market only prices fixed rate mortgages, and variable rate float based on fed rate.

  • Andrew Baldwin 8 months ago

    Daniel speaks of a “base effect” being responsible for part of the drop in the 12-month inflation rate for the Canadian CPI from August (4.0%) to September (3.8%). At least this is better than StatCan’s own term, “bae year effect”, which is absolutely ridiculous, because we are dealing with a change from a base month of August 2022 to one of September 2022; there is no change in base year. StatCan seems not only to have succeeded in confusing others, but in confusing itself. It is really a rotating-out effect, as I wrote some years back, as the September 2022 monthly rate rotates out of the 12-month growth rate, or more simply an exit effect.
    For this September update, the impact of the exit effect is more effectively illustrated with the CPI for gasoline than for the CPI All-items. The annual inflation rate for gasoline went from 0.8% in August 2023 to 7.5% in September 2023, an increase of 6.7 percentage points. The rule of thumb for estimating such changes is to take the difference of the monthly change entering the annual inflation rate and the monthly change exiting. Since the monthly inflation rate for September 2022 was -7.4% and for September 2023 was -1.3%, the difference would be (-1.3-(-7.4) percentage points or 6.1 percentage points. However, the exit effect is underestimated. If there were no change in gasoline prices in September 2022, the 11-month inflation rate for September 2022 to August 2023 would be equal to the 12-month inflation rate for August 2023. That 11-month inflation rate less the 12-month inflation rate is the appropriate measure for the exit effect. The exit effect then is 8.1 percentage points, about 0.7 percentage points larger than the negative of the monthly percent change for September 2022, as the exit effect was amplified by the substantial inflation in gasoline prices over the September 2022 to August 2023 period. The entry effect can be residually calculated but it can also be directly calculated if one chooses to do so.

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