Inflation moderates with momentum in BoC’s core measures narrowly below 3%

Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.

Bottom line

Inflation decelerated to 3.1% in October, in line with expectations. The lower inflation rate is mainly the result of lower gasoline prices and slower price increases for food. However, service prices accelerated in October. More importantly, all measures of underlying inflationary pressures decelerated in October, except for inflation excluding food and energy, which edged higher.

Inflationary pressures also narrowed only marginally, with 36% of the components of CPI rising at more than 5%, compared to 37% in September. Similarly, the share of components increasing by more than 3% only eased to 56% from 58% (see Fig 1.). The lack of improvement in these measures suggests that the deceleration of inflation is not broad-based, something that could potentially worry the BoC.

The recent trend in CPI’s monthly changes suggests that the momentum in inflationary pressures eased in October but remains elevated. As such, we observe that many of the 3-month annualized changes in some key CPI components (shelter and transportation) are still higher than the year-on-year changes, suggesting further possible acceleration in those components. On the flip side, it is below for food prices and most other major categories. (see Fig. 2) The 3-month annualized changes in headline CPI is now at 2.8%, after 5.5% in September. Similarly, the same measure for the BoC’s core measures increased by 2.96% on average, below 3% for the first time since March 2021. CPI excluding food and energy is at 3.3%, above the BoC’s target range, while it is 2.1% for the BoC’s old measure of core (CPI ex the 8 most volatile components and indirect taxes).

The continued deceleration in most measures of core inflation will ease some of the BoC worries. More particularly, inflation momentum, as measured by the 3-month annualized changes, has decelerated in most core measures, suggesting that inflation is no longer accelerating. Moreover, their levels are now much closer to 3% indicating some progress toward stabilizing inflation with the BoC’s operational band.

With oil and gasoline prices having eased further in recent weeks, headline inflation is expected to moderate further, averaging below 3% for the rest of the year. Similarly, measures of core inflation are expected to continue to moderate slightly.

The continued deceleration in headline and underlying measures of inflation practically eliminated the probability of another rate increase. Nevertheless, we believe it may still be too early for the BoC to officially declare victory and signal that it is no longer considering a rate hike, especially considering the broadness of inflation and continued strong wage growth. Looking ahead, the BoC is unlikely to contemplate rate cuts until inflation has been brought sustainably below 3%. This is unlikely to happen until the Spring.

In Alberta, inflation eased to 2.1% in October. The deceleration was mainly due to a decline in transportation costs, due to a drop in gasoline price, and reduced inflation by 0.5pp. Shelter costs decelerated, contributing 2.2pp percentage points to inflation, as lower utilities costs fully offset higher rent and owned accommodation costs. Food prices also decelerated and remained one of the main sources of inflation, adding 0.8pp to headline inflation. Inflation excluding food and energy (a measure of core inflation) declined to 2.3% and remained below the national measure.

The Consumer Price Index (CPI) increased by 0.1% m-o-m non-seasonally-adjusted in October and the inflation rate decelerated to 3.1. This was in line with expectations. Prices declined on the month in three of the eight major CPI components, led by transportation costs (-1.4% m-o-m) due to a 6.4% m-o-m drop in gasoline prices. Food prices eased for a second consecutive months (-0.1% m-o-m) and health and personal care costs were also lower (-0.1% m-o-m). The biggest increases on the month were in shelter (+0.9% m-o-m), due to continued increases in mortgage interest costs (+2.5% m-o-m), property taxes (+4.9% m-o-m) and rents (+1.4%). Recreation, education and reading cost wer up +0.9% m-o-m, as travel services rose in October (2.7% m-o-m).

Six of the eight major CPI components decelerated in October on a year-on-year basis. Food price inflation declined to 5.6%, its lowest since December 2021, but remains one of the main sources of inflation, contributing 0.9 percentage points (pp). Transportation costs were 0.4% lower than last year, thanks to a 7.8% y-o-y decline in gasoline prices, reducing inflation by 0.1pp. Household operations, furnishing and equipment costs declined -1.1% y-o-y, thanks to communication and child care costs, and reducing inflation by 0.2pp.

Shelter costs inflation accelerated to 6.1% y-o-y and is the main source of inflation, contributing 1.7 percentage points (pp), with about 1.16pp attributable to higher mortgage interest costs and 0.6pp due to higher rent. Recreation, education and reading inflation rose to 2.9% y-o-y, contributing 0.3pp to headline inflation due to an increase in travel services (+5.3% y-o-y) and digital media (+33.9% y-o-y).

In October, goods prices inflation eased to 1.6% from 3.6%, mainly due to lower gasoline prices, while services inflation accelerated to 4.6% from 3.9%. Energy prices dropped 5.4% y-o-y compared to the same month last year. Excluding food and energy, prices rose 0.5% on the month and increased by 3.4% compared to the same month last year. The Bank of Canada’s old measure of core inflation, CPI excluding the 8 most volatile components and indirect taxes, edged lower to 2.7%, below the upper band of the Bank of Canada’s operational target.

Looking at the BoC’s core measures of inflation, all indicators decelerated in October. CPI-Trim eased to 3.5% from 3.7% and CPI-Median to 3.6% from 3.9%. As a result, the average of the two measures decreased to 3.55% from 3.80%.

In Alberta, inflation dropped to 2.1% from 3.7% in October. Transportation cost was the main source of inflation deceleration, which declined 3.2% y-o-y, due to a 15.9% decline in gasoline prices, lowering inflation by 0.5pp. Household operation, furnishing and equipment costs decelerated to -1.2% y-o-y, resulting from lower communication and child care costs, lowering inflation by 0.6pp.

Shelter costs decelerated to +8.3% y-o-y and remained the main source of inflation, contributing 2.2pp to inflation. Higher electricity prices, owned accommodation costs, and rent compared to last year are this category’s main sources of inflation. Food prices decelerated to 4.7% y-o-y and remained an important source of inflation in the province, contributing 0.8pp.

Goods prices inflation dropped to 0.6% from 4.1%, while services prices accelerated to 3.6% from 3.2%. Inflation excluding food and energy edged lower to 2.3%, its lowest since January 2022, while energy costs declined 5.6% y-o-y.

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