October inflation is expected to see a slight increase despite the long-term downward trend

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TORONTO – The latest inflation readings due out on Tuesday from Statistics Canada are expected to show a slight increase in the month of October – but economists say the pace is still long-term.

Economists polled by Reuters expected the consumer price index to come in at 1.9 percent in October, down from 1.6 percent in September which was the lowest inflation reading since February 2021.

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Gasoline prices were a key reason why September’s number dropped so much, as oil fell to 65 US dollars a barrel at one point. It is also expected to be a driver for the October price hike, when it fetches US$75 per barrel.

“We expect the headline to go back to 2 per cent, but as it has come down to 1.6 per cent, it’s mainly a matter of energy,” said RBC economist Claire Fan.

The expected increase in inflation depends in part on the change in the base from the previous year and should not be seen as a reversal of the progress of reducing the rate, he said.

“The broader story is that this inflation, or the gradual reduction of inflationary pressure, is still a big trend,” said Fan.

Excluding the variable measures of energy and food – which analysts expect to remain stable at 2.8 percent – core inflation should ease to 2.2 percent in October from 2.4 percent in September, he said.

BMO Capital Markets sees headline inflation coming in at 1.9 percent and core inflation at 2.4 or 2.5 percent, said Benjamin Reitzes, managing director of Canadian rates & macro strategist, in a note.

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“The month of October seems to have a negative impact on the decrease in inflation. Rates did not really rise in the month, but the underlying results are challenging, suggesting that headline and inflation will pick up at a slower pace.”

Along with the small increase in fuel prices, he expects the increase in property taxes to have a major impact on the increase. Rising taxes will help boost shelter costs, but will be offset by a small increase in mortgage interest costs after the Bank of Canada cuts interest rates again in October.

Higher mortgage payments due to higher interest rates and a wave of mortgage renewals have been putting upward pressure on housing inflation, but lower rates should begin to ease inflationary pressure on shelters, Fan said.

“Month by month, I think, if anything, we are very close to the tipping point.”

The Bank of Canada cut its key rate by half a percentage point in October to 3.75 percent, the fourth cut since June.

On the rental side, Desjardins economist Maelle Boulais-Preseault said in a paper last week that rental inflation was 8.3 percent in the third quarter, the highest rate since the 1980s.

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That contrasted with home price growth, which fell to 5.5 percent as borrowing costs continued to fall, he said.

Rent inflation, which is meant to measure what Canadians actually pay in rent rather than the cost of new hires, is expected to slow, but not quickly.

“Our view is a slowdown in rental inflation over the next few years, coupled with rising unemployment and weak population growth,” Boulais-Preseault said.

The softening of the labor market is expected to help reduce inflationary pressure, Fan said.

That contrasts with the US, where inflation rose 2.6 percent in October from a year earlier, compared with 2.4 percent in September, as higher government spending and a tight labor market made deflation a challenge.

Both countries are deviating from key economic trends, including real GDP per capita that is the widest on record, Fan said. In Canada, the average is three percent below where it was in 2019, while it is eight percent higher in the US.

As the two economies diverge, the Canadian dollar has been under pressure, trading at its lowest level since 2020.

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A weaker loonie, a possible upward revision of GDP, and a slight increase in October inflation all lead BMO’s Reitzes to expect the Bank of Canada to opt for a small quarter-point rate cut at its December 11 meeting.

RBC however expects another half-point rate cut from the central bank, given the struggling economy and the long-term persistence of inflation.

“Given how fragile the current conditions are, and when you look at the fact that even if you reduce the rates today, it won’t help things until at least a few places down the road, they really want to load any amount of ease,” Mlaneli said.

“If they think the economy needs support, they want to do it as quickly as possible.”

This Canadian Press report was first published Nov. 17, 2024.

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