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Inflation in Canada shows temporary increase in October

Inflation in Canada Inflation in Canada Pixabay

Canada’s inflation rate saw a slight increase in October, primarily driven by rising energy prices and baseline effects from the previous year. Despite this uptick, economists emphasize that the long-term trend of easing inflation pressures remains intact. The Consumer Price Index (CPI) is expected to rise to 1.9 per cent from September’s 1.6 per cent, the lowest level recorded since February 2021.

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Energy price increase and its effect on inflation

Energy prices played a significant role in the October inflation increase. Gasoline prices surged as oil rose to over USD 75 per barrel, compared to September’s low of USD 65. This rise directly impacted the Consumer Price Index. According to RBC economist Claire Fan, these changes are primarily due to shifts in the energy market and are not indicative of broader inflationary pressures.

Baseline effects from the previous year also influenced the October figures. Low energy prices in 2022 created a comparison effect, temporarily driving inflation higher.

Core inflation, excluding volatile energy and food prices, is expected to decrease slightly. Economists forecast it to drop to 2.2 per cent in October from 2.4 per cent in September. This reflects ongoing progress in managing inflation. However, factors such as property taxes and rental costs have moderated these gains.

  • Core inflation highlights underlying trends in price stability.
  • Property tax increases are expected to push shelter costs higher.

BMO Capital Markets also projects core inflation to remain steady at around 2.4 per cent, signaling stability in the broader inflation landscape.

Shelter costs and the role of interest rates

High mortgage payments have been a key driver of shelter inflation. The Bank of Canada’s recent rate cuts, including October’s reduction to 3.75 per cent, are expected to alleviate some of this pressure. Rising property taxes, however, remain a challenge for households.

  • Rental inflation averaged 8.3 per cent in Q3 2023, the highest since the 1980s.
  • Owned accommodation price growth slowed to 5.5 per cent, reflecting lower borrowing costs.

Economists predict rental inflation to ease over time, driven by softer labor markets and slower population growth.

Economic divergence between Canada and the US

Canada and the US are showing significant economic divergence. While Canada’s inflation remains lower, the US recorded a 2.6 per cent increase in October, compared to 2.4 per cent in September. Robust government spending and a strong labor market in the US have made inflation reduction more challenging there.

Canada’s GDP per capita remains 3 per cent below its 2019 level, while the US has seen an 8 per cent increase over the same period. The Canadian dollar has also been under pressure, trading at its lowest level since 2020.

These dynamics will likely influence upcoming policy decisions by the Bank of Canada. RBC expects another 0.5 percentage point rate cut in December, while BMO forecasts a milder 0.25 percentage point reduction.

Economists emphasize that swift action by the central bank is crucial to address economic challenges effectively and support recovery in the months ahead.

source: CTV News

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