Inflation Overview

TORONTO — As the latest inflation figures are set to be released by Statistics Canada, analysts anticipate a minor rise in inflation for October. However, they are quick to clarify that this should not overshadow a longer-term trend towards decreasing inflation rates.

Consumer Price Index Predictions

Economists surveyed by Reuters predict that the Consumer Price Index (CPI) will rise to 1.9 percent for October, an increase from September's 1.6 percent, which marked the lowest rate since February 2021. A significant contributor to the low inflation figure in September was a dip in gasoline prices, which fell to about $65 per barrel. However, with oil prices rising to over $75 per barrel in October, energy prices are expected to be a primary factor driving the increase this month.

Expert Insights

Claire Fan, an economist with RBC, commented, "While we're expecting the headline inflation to nudge back up to two percent, it's largely an energy-related development." She emphasized that the expected rise is partially influenced by shifts in last year’s baseline numbers and should not be interpreted as a setback in the overarching trend of decreasing inflation.

Core Inflation Drop

Excluding the notoriously volatile sectors of energy and food, analysts predict that core inflation will decrease to 2.2 percent for October from September’s 2.4 percent. BMO Capital Markets agrees, estimating a headline inflation reading of 1.9 percent while indicating core inflation may reach around 2.4 or 2.5 percent. Benjamin Reitzes, managing director at BMO, notes that "October appears to be a bump in the downward trajectory of inflation, where prices haven’t skyrocketed, but base effects pose challenges, suggesting a modest acceleration in both headline and core inflation."

Impact of Rising Costs

In addition to the increase in energy prices, projections suggest rising property taxes will also impact inflation, particularly associated with shelter costs. This could be balanced out by a smaller increase in mortgage interest costs following the Bank of Canada's recent key rate cut.

Bank of Canada's Rate Cuts

The pressure from high mortgage payments and a wave of renewals has historically tightened shelter inflation. However, analysts believe that easing interest rates will start alleviating this upward pressure. "We are nearing an inflection point based on month-over-month data," Fan stated.

Rental Market Trends

On the rental front, Desjardins economist Maëlle Boulais-Préseault reported rental inflation spiking to an average of 8.3 percent in the third quarter, the highest rate seen since the 1980s. Meanwhile, owned accommodation price growth has slowed to 5.5 percent as borrowing costs ease. Despite expectations for rental inflation to decline, a rapid decrease is not anticipated.

Forecast for the Future

Boulais-Préseault indicated that her forecast predicts rental inflation will gradually slow in response to a rising unemployment rate and weaker population growth, contributing to a more balanced rental market.

Economic Divergence with the U.S.

In contrast, the U.S. experienced a 2.6 percent inflation increase in October, up from 2.4 percent in September, driven by higher government spending and a strong labor market. Economically, the two nations are moving in different directions, with Canada showing a real GDP per capita three percent below its 2019 levels while the U.S. exhibits an eight percent increase.

Currency Impact and Future Predictions

This divergence has put pressure on the Canadian dollar, which recently reached lows not seen since 2020. Consequently, BMO's Reitzes expects that the upcoming Bank of Canada meeting on December 11 may lead to a modest quarter-point rate cut. Conversely, RBC is predicting a more substantial half-point cut, reflecting the need for support in a struggling economy.

Conclusion

"The economic environment is quite frail," Fan noted. "Any easing measures the Bank considers should be implemented swiftly to allow the economy to adjust in a timely manner."

The economic landscape remains dynamic, with evolving inflation metrics prompting anticipation and careful analysis among both economists and policymakers. Stay tuned for more updates as the situation unfolds!