MNI: Canada CPI Slowest In 3-1/2 Years On Gas, Core Steady

Canadian inflation slowed to the lowest in three-and-a-half years in September, down more than economists predicted on a drop in gasoline prices, and coming below the central bank's 2% target for the first time since the price surge during the pandemic rebound.

The consumer price index slowed to 1.6% from a year ago, Statistics Canada said Tuesday from Ottawa, lower than August's 2.0% and the market consensus for a 1.8% increase. Gasoline prices led the moderation, down 11% versus the prior 5% decline.

Core indexes tracked by the Bank of Canada had already fallen to the lowest since 2021 in the prior report and remained slightly elevated in September with the trim index at 2.4% and the median index at 2.3%.

Bank Governor Tiff Macklem has cut borrowing costs by a quarter point at three straight meetings since June and said he can go slower or faster based on his view of progress towards a forecast that inflation settles near the target sometime next year. Some investors had already been betting that following a Fed 50bp rate cut and signs growth is lagging the Bank's Q3 forecast Macklem will make a jumbo cut at the Oct. 23 meeting. This inflation report is the last major data expected before then.

Inflation was also slower than expected on a month-over-month basis, down 0.4% versus a forecast for a 0.3% decline. The fall was also led by gasoline prices, something the Bank and economists have cautioned could be a base effect that will unwind later before inflation settles down at target. 

Core inflation remaining elevated due to higher mortgage interest costs and rent suggests the battle against stubborn inflation that required 10 rate hikes to quash is not quite over. Still, Macklem has warned there's some risk of undershooting now. The Bank had predicted inflation would average 2.3% in the third quarter. 

Some other evidence remains mixed even as growth is coming in weak. Friday’s hot job report dented expectations the Bank would cut by half a point while the Bank’s own quarterly household and business surveys showed wage and price expectations moderating but still somewhat elevated. Firms viewed inflation at 2.5%, for example.

But Monetary policy remains tight with the benchmark borrowing rate of 4.25% well above inflation, and former officials have told MNI the Bank needs to cut to neutral below 3% by around the middle of next year.