People shop in a grocery store in Montreal, Wednesday, November 16, 2022. Statistics Canada is set to release its September inflation reading this morning. THE CANADIAN PRESS/Graham Hughes
OTTAWA – Canada’s inflation rate edged down to 3.8 per cent last month as price pressures eased across the economy, setting the stage for the Bank of Canada to hold its key interest rate steady next week, economists say.
Statistics Canada released its latest consumer price index report on Tuesday, which showed inflation slowing once more in September after rising to four per cent in August.
The data was a welcome surprise for economists.
The federal agency said grocery prices were up 5.8 per cent year-over-year in September compared with 6.9 per cent in August.
The report shows the main upward pressures on annual inflation last month were mortgage interest costs, rent, food purchased from restaurants, gasoline and electricity. Meanwhile, lower prices for telephone services, natural gas, air transportation, childcare and housekeeping services and furniture helped pull inflation down.
Economists reacting to the latest inflation data say that it adds more evidence that the Bank of Canada, which is gearing up for a rate decision on Oct. 25, can remain on the sidelines and wait for inflation to continue falling.
“I think the Bank of Canada will smile a little bit after this report. It takes the pressure off them heading into next week’s meeting, and they should very much be on hold when they make their decision,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategist.
The central bank’s key interest rate sits at five per cent, the highest it’s been since 2001.
Bank of Canada governor Tiff Macklem recently said he expects the governing council’s deliberations to focus on whether the central bank should exert more patience with inflation, or act swiftly to clamp down on price growth.
The central bank has been fighting runaway inflation with higher interest rates since March 2022. And while inflation has not yet returned to its two per cent target, the central bank is trying to not overdo it with rate hikes, given the economy has already started to buckle under the weight of higher borrowing costs.
“The softer economic backdrop suggests we should see inflation continue to slow as we head into 2024,” Reitzes said.
Since last year, economic growth has slowed significantly and the labour market is not longer as hot as it was coming out of COVID-19 lockdowns.
As previous rate hikes continue to feed through the economy, forecasters anticipate the softness to continue. Economists estimate it can take one to two years for the full effect of a rate hike to work its way through the economy.
“The lagged impact of interest rate hikes to-date will continue to exert downward pressure on consumer spending as debt payments rise as a share of household incomes, making it more challenging for businesses to raise prices as fast and as frequent,” wrote RBC economist Claire Fan in a client note.
The Bank of Canada will be paying close attention to core measures of inflation, which strip out price volatility, to gauge the direction in which inflation is headed.
The inflation report showed the central bank’s preferred core measures have decelerated since August, but remain elevated.
This report by The Canadian Press was first published Oct. 17, 2023.
