National Bank economists Taylor Schleich and Ethan Currie wrote that unless recent inflation trends were “totally derailed/recast” by today’s data, the Bank of Canada is likely to cut interest rates again at its October 29 announcement. (Photo by Liang Sen/Xinhua via Getty Images) · Xinhua News Agency via Getty Images
Canada’s annual inflation rate rose more than expected in September, a move that economists say may complicate, but not derail, expectations for another Bank of Canada (BoC) interest rate cut next week.
The consumer price index increased 2.4 per cent from a year earlier, up from 1.9 per cent in August, Statistics Canada said Tuesday. Financial industry observers had expected the inflation rate to increase to 2.2 per cent, according to consensus estimates published by CIBC Economics.
“Suffice it to say this will make the Bank of Canada’s decision a bit more interesting next week than previously expected,” BMO chief economist Douglas Porter wrote in a note to clients.
Market odds of a BoC rate cut on October 29 declined slightly from 77 per cent to 69 per cent in response to the inflation data, TD economist Andrew Hencic said.
On a monthly basis, CPI increased 0.1 per cent in September. Seasonally adjusted, CPI rose 0.4 per cent on the month.
The acceleration was largely driven by a smaller year-over-year drop in gasoline prices, which fell 4.1 per cent compared with a 12.7 per cent decline in August. Statistics Canada said the shift partly reflected a base-year effect, since gasoline prices had plunged a year earlier amid weaker global oil demand and falling crude prices. Refinery maintenance and disruptions in Canada and the U.S. also pushed pump prices higher last month.
Other categories continued to exert upward pressure. Rent rose 4.8 per cent nationwide, led by a 9.6 per cent increase in Quebec, while grocery prices climbed four per cent, the fastest pace since late 2023. Statistics Canada said fresh vegetables and sugar products saw some of the largest monthly gains after weaker readings earlier this year.
Excluding gasoline, inflation ran at 2.6 per cent, up from 2.4 per cent in August. Core inflation measures were mixed, with CPI-trim edging up 0.1 percentage points to 3.1 per cent and CPI-median holding at 3.2 per cent (the August figure was revised upward in this latest data). The BoC has traditionally used those measures to assess underlying inflation with more volatile prices removed — but the usefulness of that data has recently been questioned by economists and the central bank itself.
Economists said the rise in headline inflation masked signs of easing price pressures beneath the surface. Desjardins Group economist Royce Mendes noted that “the distribution of price growth actually shifted somewhat lower,” with fewer categories seeing outsized increases. The share of CPI components rising more than three per cent declined to about 39 per cent, while the share with growth below one per cent rose to nearly 37 per cent, he said.
CIBC economist Andrew Grantham said the headline surprise “makes the Bank of Canada’s interest rate decision next week a little more complicated,” but that core measures remain “just subdued enough to support” a 25-basis-point reduction.
Mendes had a similar view, writing that “a few volatile categories drove the headline surprise” and that “underlying inflation remains in check,” with a cut forecast for next week. TD’s Hencic said “one hotter-than-expected month does not a new trend make,” noting that the unemployment rate and the Bank’s own survey data show “ample slack” in the economy. “The Bank of Canada should still have room to deliver another cut,” he wrote, pointing to weak business sentiment and a soft labour market.
BMO’s Porter, however, argued that the core measures “revealed some annoying stickiness,” even if they remain consistent with the BoC’s assessment that underlying inflation is around 2.5 per cent. Though BMO expects the BoC to eventually cut rates to two per cent, the “setback for core” makes an October cut less likely, Porter said.
RBC expects a cut next week, economist Abbey Xu wrote, with the easing cycle potentially ending there for now.
“We expect cutting beyond that, into outright stimulative levels of interest rates, will be more difficult with inflation still sticky at an above-target rate and fiscal policy potentially ramping up as a support after the federal budget in early November,” Xu wrote.
Today’s Consumer Price Index data follow Monday’s release of the BoC’s business and consumer surveys, which National Bank of Canada economists Taylor Schleich and Ethan Currie characterized as “downbeat.” Furthermore, the economists said, markets “now appear to be looking through” a surprise jump in the labour market earlier this month that observers at the time said complicated the BoC’s considerations.
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on X @jmacf.
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