up, but on target

With today’s release of the latest Consumer Price Index (CPI) data from Statistics Canada, the overall rate of inflation saw a directional change, increasing from 1.6% in September to 2.0% in October, right on the Bank of Canada’s target. While this was the first month-to-month increase in the headline rate since May, the October CPI data show that inflation is under control and should pave the way for another interest rate cut from the Bank on December 11th.

Much of September’s decline in inflation can be attributed to falling gasoline prices two months ago, leading to a 10.7% annual decline in the gasoline component of the CPI. After gasoline prices rose between September and October, gasoline was only 4% lower than 12 months earlier, putting upward pressure on the headline rate. In fact, the All items CPI excluding gasoline was unchanged last month, at 2.2%.

The biggest driver of inflation continues to be shelter, which saw its annualized rate decline to 4.8% in October. Once again, shelter inflation has been buoyed by mortgage interest costs—inflation of all items excluding mortgage interest was just 1.4%—and rents, which are overstated in the CPI, but likely lagging what’s actually happening on the ground (average asking rents are either flat or declining modestly in most of the country). The other contributor to elevated shelter inflation, which is unique to the month of October, is property taxes. These are adjusted only once a year, in October, and were up 6.0% annually last month (and will remain at 6.0% until next October) after increasing 4.9% over the past 12 months.

The October inflation data give enough evidence that inflation is largely under control, even as volatile components like gasoline change month-to-month. After a “jumbo cut” in October, the Bank of Canada is primed to cut its policy rate again on December 11th as it aims to get back into its neutral range of 2.25-3.25%, though it will likely revert back to its preferred increment of 25 basis points.