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.”