In a surprising twist, Canada's annual inflation rate unexpectedly climbed to 2% in October, creating uncertainty for economists anticipating further interest rate cuts from the Bank of Canada (BoC) in December. This increase, attributed significantly to fluctuations in gasoline prices, contradicted the forecast that predicted a more modest rise to 1.9%.

Statistics Canada reported the uptick in the Consumer Price Index (CPI), which marked a jump from a 1.6% annual pace in September. The rise in core inflation measures was also notable, with the CPI-median increasing from 2.1% to 2.2% and the CPI-trim from 2.4% to 2.6% over the same period.

Katherine Judge, an economist at CIBC Economics, characterized this report as a disappointment for the BoC, given the recent trend of more favorable economic indicators. Despite this setback, she maintains her prediction of a 50 basis point (bps) cut in December, citing anticipated evidence of slack in the economy from upcoming labor market and GDP reports.

On the other hand, Desjardins' senior director of Canadian economics, Randall Bartlett, has a more conservative outlook. He continues to advocate for a 25 basis point rate reduction, arguing that the BoC is likely to overlook any temporary resurgence in inflation rates driven by base effects—previously low month-over-month price growth that influences current year-over-year comparisons.

In light of the recent data, analysts at BMO Capital Markets and TD Economics also support the idea of a modest 25 bps cut in December, suggesting that the higher CPI reading poses "no big surprise" and represents merely a "minor setback" in the broader economic landscape.

Looking ahead, the Bank of Canada is set to announce its latest rate decision on December 11. Governor Tiff Macklem previously reassured Canadians that they could "breathe a sigh of relief" and not worry about sudden hikes in their cost of living, following four consecutive rate reductions since June. The focus now shifts to forthcoming GDP and job data, which are expected to play pivotal roles in influencing the Bank’s decision-making process.

As the economic puzzle unfolds, all eyes will be on the central bank’s next moves and how they plan to navigate through these inflationary pressures while aiming for a sustainable economic recovery. Will the BoC stick to its guns with a larger cut, or will it play it safe with a modest reduction? Only time will tell!