Do signs of further price deceleration end the argument for a hawkish BoC?
Consumers saw a little bit more price relief in October with food and energy prices softening, but the case for lower rates from the Bank of Canada is still far from made.
The latest monthly inflation report from Statistics Canada, released Tuesday morning, showed annual CPI rising 3.1% on a year-over-year basis in October, down from a 3.8% annual gain in September.
The further deceleration in headline CPI came amid softer prices for food and energy which were the primary forces driving decades-high record inflation from summer 2022 until earlier this year.
Statistics Canada’s October data showed food prices falling for a third consecutive month, bringing down annual inflation for groceries from 5.8% to 5.4%. Nevertheless, food purchases from stores were among the largest contributors to the annual CPI increase, along with mortgage interest cost and rent.
“Gasoline was down 6.4% in the month, a bit less than expected, but looks to be down another 2.5%-to-3% in November,” Douglas Porter, chief economist and managing director Economics at BMO, said in a note. Prices at the pump declined 7.8% on a year-over year basis.
Another inflation commentary from RBC, authored by Claire Fan and Abbey Xu, noted the core inflation measures favoured by the BoC – which include core-trim and core-median – remain above the 2% inflation target, though still look better based on their respective three-month rolling averages.
“Abnormally high Inflation is impacting a smaller share of products in the consumer basket,” they said.
Simon Harvey, head of FX Analysis at Monex Europe and Canada, said the October inflation numbers “completely undermined the BoC’s hawkish bias” when read in conjunction with signs of growing slack in the jobs market, as well as shades of a shallow recession emerging in growth data.
“While the BoC’s measures of underlying inflation are illustrative of the overall price pressures within the Canadian economy, it is worth noting that the details of October’s CPI report were also soft,” Harvey said. “Goods prices remained in contraction at -0.8% MoM having fallen -0.3% in September, while most of the 0.9% increase in services inflation stemmed from shelter (+0.856%).”
“This is yet another confirmatory point for our view that the BoC, having led the Fed during the hiking cycle, will once again be the pace setter in the 2024 easing cycle, with a cut likely as early as April,” Harvey said.
Porter isn’t as confident. While he agreed the latest inflation numbers suggest there’s no need for further BoC tightening, he said the central bank has to see evidence of cooling in services – where prices have remained generally sticky – before it can contemplate rate cuts.
“Overall, today's result drives home the point that there is no need for further BoC tightening, especially with the economy already struggling to grow at all and underlying inflation calming,” he said. “However, before the Bank can even begin seriously considering rate relief, we'll need to see more evidence that services inflation is also moderating—that could be at least another six months down the road.”