Headline Inflation:
- Year-over-year inflation rose to 2.4% in September, up from 1.9% in August, slightly exceeding expectations.
- The increase was primarily due to a smaller decline in energy prices compared to previous months.
Core Inflation Measures:
- The Bank of Canada's preferred measures, CPI-trim and CPI-median, remained above 3% year-over-year, with slight acceleration in their 3-month rolling averages.
- CPI-trim: 2.6% (3-month average)
- CPI-median: 2.7% (3-month average)
Key Drivers:
- Energy Prices: Declined by 2.6% year-over-year, a smaller drop than August's 8.3%.
- Food Costs: Increased to 4% from 3.5% in August, driven by higher grocery prices.
- Shelter Costs: Remained steady at 2.6%, though rent inflation rose to 4.8% from 4.5%.
- Travel Tours: Continued to decline, but at a slower pace (-1.3% vs. -9.3% in August).
- Tuition Fees: Increased by 1.7%, the slowest rate since 1976 (excluding 2019).
Inflation Breadth:
- The percentage of CPI components with annualized 3-month inflation rates above 3% narrowed slightly to 47% from 50% in August.
Bank of Canada's Perspective:
- Inflation remains above the BoC's 2% target, but the central bank cut the overnight rate in September despite this.
- Factors supporting the BoC's view of easing inflation risks include:
- Higher unemployment rate.
- Lower business inflation expectations.
- Removal of most Canadian counter-tariffs.
Interest Rate Outlook:
- One more rate cut is expected in October, bringing the overnight rate to 2.25%, the lower bound of its estimated neutral range.
- Further cuts into stimulative levels are considered challenging due to persistent above-target inflation and potential fiscal policy support post-November federal budget.
Conclusion:
While headline inflation ticked higher in September, the Bank of Canada is likely to proceed with a cautious rate cut in October, balancing persistent inflationary pressures with easing risks. Further monetary policy adjustments will depend on upcoming economic data and fiscal developments.