Inflation rose 6.9% in October, but encouraging signs emerge

TORONTO, CANADA - NOVEMBER 10: People stock up on groceries from a supermarket after the increase in inflation in Toronto, Canada on November 10, 2022. (Photo by Seyit Aydogan/Anadolu Agency via Getty Images)
Food inflation in Canada slightly moderated in October. (Photo by Seyit Aydogan/Anadolu Agency via Getty Images)

Consumer prices rose another 6.9 per cent year-over-year in October, matching consensus expectations by economists, as surveyed by Bloomberg, Statistics Canada reported Wednesday, but a look into the details shows momentum in inflation could be starting to wane.

"While the result was right in line with the consensus call, any CPI that is no worse than expected should be viewed as a big win these days," Doug Porter, chief economist at BMO Capital Markets, said in a note.

The headline increase was driven by higher fuel prices and mortgage interest costs.

Gasoline prices surged more than nine per cent on a monthly basis, following a decrease in September, as OPEC announced it would cut production and a weakening loonie further lifted prices in Canada.

Given the run-up in gasoline prices, headline inflation coming in at 6.9 per cent isn't "a terrible outcome," Porter said.

Although slowing price increases for food helped offset hotter prices at the pump, grocery bills still jumped 10.1 per cent year-over-year.

On a monthly basis, price increases for food, clothing and furniture decelerated.

Although the Bank of Canada's preferred trim and median core inflation measures accelerated in October, the three-month annualized rates that the central bank has been focused on as of late declined.

"This is a significant development given that these measures reinforce the idea that underlying inflationary pressures are settling down in Canada," said Royce Mendes, managing director and head of macro strategy at Desjardins, in a note.

"The fact that they are tracking much closer to the Bank of Canada's 1-3% inflation target range will take pressure off the central bank to keep pace with the Fed."

The Bank of Canada's job in reining in inflation to its two per cent target is not done yet though.

"There's still a long way to go, and we can't expect a lot of progress until the lagged impacts of rate hikes to date work their way into slower demand," Avery Shenfeld, chief economist at CIBC Capital Markets, said.

Wednesday's report is the last reading before the central bank's next interest rate decision in early December.

In October, the Bank opted to raise its key lending rate by a smaller-than-expected 50 basis points to 3.75 per cent. Governor Tiff Macklem warned more rate hikes are firmly on the table.

BMO's Porter says he believes the central bank's overnight lending rate will need to rise above four per cent to truly crack down on underlying inflation pressures. BMO is currently calling for a half-point hike in December, but says it's considering lowering its call to a quarter-point increase.

Desjardins is predicting one more quarter-point hike before the Bank of Canada pauses to assess the delayed impact of higher rates.

The Canadian dollar's reaction to the data was muted.

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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