Consumer price inflation decreased to 3.8% on a year-on-year (y/y) basis in September, down from 4.0% in August. Prices fell 0.1% on a month-on-month basis. This month’s result was below consensus expectations.
Food prices continued to decline, with a rise of 5.8% y/y, led by slower increases in meat and dairy products. The food component of the Consumer Price Index (CPI) basket is now second to shelter (+6.0%) as the fastest rising components on an annual basis.
Shelter inflation remained steady at 6.0% y/y in September. An increase in rented accommodation (up to 7.1% from 6.4%) was counterbalanced by a decline in owned accommodation (falling to 6.3% from 6.4%).
Gasoline prices decreased by 1.3% on a monthly basis, reversing the significant 4.7% gain seen last month. Year-over-year, gasoline prices increased by 7.5% in September at the national level, following a 0.8% increase in August. It is worth noting that September’s strong annual price increase is influenced by a weak reference period last year.
The transportation basket rose to 3.2% y/y, although this increase was offset by a substantial decline in air transportation (-21.1%) as airlines increased flight offerings over the past year.
Prices for new passenger vehicles (1.7% y/y) contributed to slowing the pace of durable goods price growth, with an increase of only 0.4% y/y in September compared to 1.4% y/y in August.
The Bank of Canada’s underlying inflation measures also declined in September. CPI-trim fell to 3.7% y/y from 3.9% y/y in August, while CPI-median dropped to 3.8% y/y from 4.1% y/y in August.
Inflation for core goods seems to be the cause of the deceleration in core inflation measures in September. Core goods inflation decreased to 2.4% y/y from 2.9% in August.
Key Implications
Today’s inflation figure represents another small step towards addressing the remaining inflation concerns. The decline in core inflation measures is particularly welcome after several consecutive months of increase. On a three-month annualized basis, the CPI-trim and median core measures averaged a decline from 4.3% to 3.7%.
Markets have significantly lowered their expectations of an interest rate hike at next week’s meeting. Bond yields also decreased by 8 basis points (bps) and 4 bps for the 2 and 10-year yields, respectively. With today’s inflation figure, the Bank of Canada now has all the relevant data to make their policy decision next week. Considering other indicators showing a cooling momentum in Canada’s economy, there is sufficient evidence to suggest that the Bank of Canada will maintain the policy rate at 5.00% next week.
