Canada’s inflation rate cooled more than expected in September, strengthening the case for a larger interest rate cut at the Bank of Canada’s next policy meeting.
Data released Tuesday by Statistics Canada showed annual inflation eased to 1.6 per cent in September, down from two per cent in August and below the central bank’s target. The softer reading has increased expectations that the Bank of Canada could opt for a half-percentage-point cut instead of its usual quarter-point move when it announces its next decision on Oct. 23.
Tu Nguyen, an economist at RSM Canada, said she had anticipated inflation would stay closer to the two per cent target for longer.
“This is one of those times where I’m glad to be wrong,” Nguyen said, noting that the sharper slowdown in price growth changes the policy outlook.
While the central bank has so far preferred a cautious approach cutting rates by 25 basis points at a time Nguyen said the latest inflation data raises the likelihood of a 50-basis-point reduction.
“It’s becoming clear that policy may be behind the curve when it comes to easing,” she said.
The inflation report is the final major data release ahead of the Bank of Canada’s October rate announcement, which will also include updated economic forecasts in its Monetary Policy Report.
The softer inflation numbers arrived just days after stronger-than-expected employment data showed the economy added 47,000 jobs in September, with the unemployment rate falling to 6.5 per cent. Nguyen cautioned, however, that monthly job figures have been volatile and that September’s gain may not signal a lasting trend.
According to Statistics Canada, lower gasoline prices were the main reason inflation slowed. Gas prices dropped 10.7 per cent compared with a year earlier. When gasoline is excluded, inflation stood at 2.2 per cent, suggesting underlying price pressures remain closer to the Bank of Canada’s target.
Claire Fan, an economist at Royal Bank of Canada, said shelter costs continue to rise faster than other components of the consumer price index.
“Outside of housing-related expenses, price pressures have largely returned to pre-pandemic norms,” Fan said in a research note.
Rent growth eased slightly but remained elevated, increasing 8.2 per cent year over year in September, down from 8.9 per cent in August. Mortgage interest costs also remained high, rising 16.7 per cent, though that marked an improvement from 18.8 per cent the previous month.
Food prices continued to outpace overall inflation. Grocery prices rose 2.4 per cent, unchanged from August. Beef prices jumped 9.2 per cent, while edible fats and oils climbed 7.8 per cent, and egg prices rose five per cent. Restaurant food prices increased 3.5 per cent, slightly higher than in August.
So far this year, the Bank of Canada has cut its key policy rate three times, bringing it down to 4.25 per cent. Governor Tiff Macklem has said further rate cuts are likely as inflation continues to ease, though he has emphasized that both the timing and size of future moves will depend on incoming economic data.
In September, Macklem also signalled the central bank is open to adjusting the pace of rate cuts if conditions justify it leaving markets closely focused on whether October will bring a larger-than-usual move.
