By Robb M. Stewart
OTTAWA--Inflation in Canada unexpectedly eased last month due to a fairly broad-based economic deceleration, easing pressure on the central bank to resume lifting interest rates next week.
The consumer-price index, a closely watched inflation gauge, rose 3.8% from a year earlier, Statistics Canada said Tuesday. The market was expecting the index to advance 4.0%, the same pace as the month before when it accelerated for a second month in a row.
Monthly inflation fell 0.1% from August, weaker than the consensus expectation for it to be flat and after a surprise acceleration to 0.4% the month before.
Core measures that strip out more volatile price moves also improved, which economists said should offer central bank policy makers some comfort since the lagged affect of past interest rate increases is helping cool demand even as the economy has shown signs of faltering in recent months.
"This inflation report points in the direction of patient monetary policy," said Michael Greenberg, portfolio manager at Franklin Templeton Investment Solutions. He expects interest rates to remain unchanged for the rest of the year. "They clearly need to deal with the still-too-high inflation, but also have no desire to tank the economy, as neither outcome is helpful for Canadian households."
The inflation report is one of the last major indicators Canada's central bank will have to consider before its Oct. 25 policy meeting. Bank of Canada officials have expressed concerns about the persistence of underlying inflationary pressures, but have sought to balance the risk monetary policy isn't yet restrictive enough against possible overtightening before past rate increases have time to slow demand.
Two measures of core inflation the Bank of Canada closely monitors, weighted median and trimmed mean, cooled in September to an average 3.75% from 4.0% the month before, Statistics Canada said. That is expected to be welcomed by the bank, though three-month rates of core inflation remain in the 3.5%-to-4% band they have been in for about a year despite the Bank of Canada's efforts to drive annual inflation back down to its 2% target.
The central bank, which is set to update its projections next week, had forecast inflation would remain at roughly 3% for about a year following a rapid deceleration from an 8.1% peak in the summer of 2022. Comparisons with a year ago are growing tougher, given inflation had been cooling steadily up until recently.
The latest report showed prices for groceries remain elevated, rising above the headline rate of inflation, but the pace continues to slow and hit 5.8% on-year in September from a 6.9% increase the month before.
Prices for durable goods also decelerated last month, thanks in large part to a smaller rise in prices for new passenger vehicles with improved inventory levels compared with last year, and Canadians paid less for airfares, coinciding with the increased number of flights being offered by airlines over the last year. Still, prices heated up in September for non-durable goods, and gasoline costs rose at a faster pace.
Excluding gasoline, CPI advanced 3.7% after an increase of 4.1% in August. Stripping out energy and food, other volatile components, inflation advanced 3.2% from last year, the slowest pace since November 2021.
"The level of inflation remains much too high for comfort but the trend is the Bank of Canada's friend here," said Benjamin Reitzes, Canadian rates and macro strategist at Bank of Montreal. "Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we're likely to see ongoing disinflationary pressure...there's no need for further rate hikes in Canada."
Canada's economy contracted modestly in the second quarter and is heading toward a second sluggish quarter. Still, the labor market continues to show signs of resilience and age gains are outpacing inflation, rising on a monthly basis in September for permanent employees, and inflation expectations remain elevated near term, with a recent central bank survey pointing to an expectation by businesses that inflation will take longer than three years to return to target.
For Randall Bartlett, senior director of Canadian economics at Desjardins, that hints at a hawkish tone from the central bank and a threat to raise rates again if the data don't cooperate when it remains on hold at next week's meeting.
Write to Robb M. Stewart at robb.stewart@wsj.com
(END) Dow Jones Newswires
10-17-23 1100ET
