Economists expect October inflation to show a slight uptick but the measure still on long-term downward trend

The latest inflation reading due out Tuesday from Statistics Canada is expected to show a slight uptick for the month of October – but economists say the measure is still on a longer-term downward trend.

 

Economists polled by Reuters expect the consumer price index to come in at 1.9 per cent for October, up from 1.6 per cent in September, which was the lowest inflation reading since February, 2021.

 

The price of gasoline was a key reason the September number came in so low, as oil dropped to a low of around US$65 a barrel at one point. It’s also expected to be a driver for the increase in October, when it crested US$75 a barrel.

 

“We’re expecting headline to go back up to 2 per cent, but just like how it dropped down to 1.6 per cent, it’s mostly an energy story,” said RBC economist Claire Fan.

 

The expected inflation increase is in part based on shifts in last year’s baseline and shouldn’t be seen as a move away from progress on getting the measure down, she said.

“The broad story really is that this low inflation, or progressively easing inflation pressure, it’s still very much the trend,” Ms. Fan said

Excluding the volatile measures of energy and food – which Ms. Fan expects to remain steady at 2.8 per cent – core inflation should tick lower to 2.2 per cent in October from 2.4 per cent in September, she said.

 

BMO Capital Markets sees headline inflation coming in at 1.9 per cent and core inflation at 2.4 per cent or 2.5 per cent, Benjamin Reitzes, its managing director of Canadian rates and macro strategist, said in a note.

 

“October looks to be a bump in the road for the downward trend in inflation. Prices didn’t exactly surge in the month, but base effects are challenging, suggesting that headline and core inflation will accelerate modestly.”

 

Along with a mild increase in gasoline prices, he expects surging property taxes to be a key driver for the increase. Rising taxes will help push up shelter costs, but this will be offset by a smaller increase in mortgage interest costs after the Bank of Canada cut interest rates again in October.

 

High mortgage payments because of interest rates and a wave of mortgage renewals have been putting upward pressure on shelter inflation, but the downward trend in rates should start to relieve pressure on shelter inflation, Ms. Fan said.

 

“On a month-over-month basis, I think we are, if anything, very close to an inflection point.”

 

The Bank of Canada lowered its key rate by half a percentage point in October to 3.75 per cent, the fourth drop since June.

 

On the rental side, Desjardins economist Maëlle Boulais-Préseault said in a note last week that rental inflation averaged 8.3 per cent in the third quarter, the highest pace since the 1980s.

That’s in contrast to owned accommodation price growth, which decelerated to 5.5 per cent as borrowing costs continued to come down, she said.

 

Rent inflation, which aims to measure what Canadians actually pay in rent rather than just the cost of new rentals, is expected to come down, but not in a hurry.

 

“Our outlook is for a slowdown in the pace of rent inflation over the next few years, in line with a rising unemployment rate and weaker population growth,” Ms. Boulais-Préseault said.

 

The softening of the labour market is also expected to help reduce pressure on inflation, Ms. Fan said.

 

That’s in contrast to the United States, where inflation rose 2.6 per cent in October from a year earlier, compared with 2.4 per cent in September, as higher government spending and a robust labour market are making inflation reductions a challenge.

 

The two countries are diverging on a range of key economic measures, including real GDP per capita that is the broadest spread on record, Ms. Fan said. In Canada, the measure is 3 per cent below where it was in 2019, while it’s 8 per cent higher in the U.S.

 

As the two economies diverge, the Canadian dollar has been under pressure, trading at lows not seen since 2020.

 

The weaker loonie, a possible upward revision of GDP, and the slight increase in October inflation all lead BMO’s Mr. Reitzes to expect the Bank of Canada to opt for a milder quarter-percentage-point cut in the key rate at its Dec. 11 meeting.

 

RBC, however, is expecting another half-point cut from the central bank, given the struggling economy and the time lag for rates to have an effect.

 

“Given how weak current conditions are, and given the fact that even if you cut rates today, it won’t help with things until probably at least a couple quarters down the road, they really want to front-load any amount of easing,” Ms. Fan said.

 

“If they think the economy needs the support, they want to do it as quickly as possible.”

 

 

 

 

This article was first reported by The Canadian Press