Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation decelerated to 1.6% in September, its lowest since February 2021 and below the midpoint of the inflation target. The deceleration was mainly the result of lower gasoline and airfare prices. The average of the Bank of Canada’s core inflation measures was unchanged at 2.35% and remained below 3% (the upper band of the inflation target) for a seventh consecutive month.
In addition, the breadth of inflationary pressures narrowed slightly in September. The share of components of CPI rising by more than 5% edged lower to 11% from 13%, its lowest since September 2020, and the share of components increasing by more than 3% was unchanged at 26%. Both measures are in line with their historical norm (see Fig 1.). The decline in the share of components rising by 5% suggests less extreme upside price pressures in inflation.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures eased further and is close to the bottom of the inflation target. As such, we observe that the 3-month annualized changes in five of the eight main CPI components are below 3% (see Fig. 2), with the 3-month annualized changes in headline CPI at 1.25%.
Moreover, the momentum of BoC’s core measures eased to 2.1% on average, and it is the eighth consecutive month that the momentum in BoC’s core measure of inflation has been at or below 3.0% (see Fig 2). This decline suggests that the stickiness in the core measures in September was mainly the result of a base effect, not recent price dynamics.
Overall, the Bank of Canada will welcome today’s report as it confirms that inflation continues to ease. Moreover, the breadth of inflationary pressures and the momentum of core inflation suggest a lack of underlying inflationary pressures. As we wrote earlier this month, we believe the BoC should accelerate the return to a more neutral monetary policy, especially considering the lacklustre economy and the lack of inflationary pressures. Doing so would allow the BoC to buy some insurance against an economic downturn. With this in mind, we think the BoC will cut its policy rate by 50bp at the October meeting, by another 50bp at the December meeting and by 25bp in January. This would bring the policy rate to 3.00%, about the upper range of the BoC’s estimate of neutral.
In Alberta, inflation eased to 1.9% in September. A deceleration in transportation costs due to lower gasoline prices was the main source of easing in inflation. As such, shelter costs accelerated to 4.2% y-o-y, contributing 1.1pp to inflation due to a smaller decline y-o-y in electricity and natural gas prices than in August. Food price inflation decelerated and remained one of the main sources of inflation, adding 0.6pp to headline inflation. Inflation excluding food and energy (a core inflation measure) was unchanged at 2.9%, remaining above the national measure and the highest amongst the provinces. With wages in Alberta coming in at 2.3% in September, Albertans saw little to no improvement in their purchasing power.
The Consumer Price Index (CPI) eased by 0.4% non-seasonally-adjusted in September and the inflation rate eased to 1.6%, its lowest since February 2021. This was slightly below expectations. The decrease in prices in September was mainly the result of lower gasoline prices (-7.1% m-o-m), and air travel (-14.3% m-o-m).
On a year-on-year basis, four of the eight major CPI components decelerated in September. Shelter cost inflation eased to 5.0% from 5.3% and remained the main source of inflation, contributing 1.5pp to headline inflation, mainly due to higher rent (contributing 0.6pp) and mortgage interest costs (contributing 0.9pp).
Transportation costs inflation was decreased to -1.5% from -0.1%, reducing headline inflation by 0.3pp. This deceleration was due to lower gasoline prices (-10.7% y-o-y), motor vehicle costs (-1.0% y-o-y), and lower air travel costs (-4.4% y-o-y) compared to last year.
Clothing and footwear costs declined by 4.4% y-o-y, unchanged from August, and were one of the main drag on inflation, subtracting 0.2pp to the headline.
Food price inflation accelerated slightly to 2.8% y-o-y, contributing 0.5pp to inflation. This was mainly the result of continued increases in restaurant costs and higher meat and vegetable prices.
In September, goods price inflation eased to -1.0% from -0.7%, while service price inflation eased to 4.0% from 4.3%. Energy prices are 8.3% lower compared to the same month last year, after declining 4.7 % y-o-y in August. Excluding food and energy, prices eased 0.1% m-o-m in September and increased by 2.4% 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 higher to 1.6%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they all remained unchanged at their lowest level since the start of 2021. CPI-Trim stayed at 2.4% and CPI-Median at 2.3%. As a result, the average of the two measures remained at 2.35%, below 3% for a seventh consecutive month and their lowest level since April 2021.
In Alberta, prices decreased 0.6% m-o-m and inflation eased to 1.9% in September.Only three out of eight CPI components decelerated on the month. Shelter costs accelerated, increasing 4.2% y-o-y compared to 3.8% y-o-y in August and remain the main source of inflation, contributing 1.1 percentage points to inflation. The increase in shelter costs was due to a base effect coming from a smaller decline in utility costs compared to last year, especially electricity and natural gas. On the flip side, rent costs decelerated slightly to 11.5% y-o-y (contributing about 0.7pp to inflation) and are rising faster than in any other province.
Food price inflation eased to 3.2% y-o-y and remained an important source of inflation in the province, contributing 0.6pp.
Transportation costs decelerated to +0.1% compared to last year, as a result of lower gasoline prices (-0.7% y-o-y).
Household operations, furnishing and equipment costs were a small drag on inflation in September, declining 0.4% y-o-y. As a result, the sector reduced inflation by 0.1pp. Similarly, clothing and footwear prices fell 2.2% y-o-y, reducing inflation by 0.1pp.
Goods prices declined 1.0% y-o-y from -0.9% y-o-y, while services prices decelerated to 4.7% y-o-y from 4.9%. Inflation excluding food and energy eased slightly to 2.9%, higher than the national measure and the highest of all provinces. Energy costs eased further to -10.7% y-o-y from -9.3% y-o-y.
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Independent Opinion
The views and opinions expressed in this publication are solely and independently those of the author and do not necessarily reflect the views and opinions of any organization or person in any way affiliated with the author including, without limitation, any current or past employers of the author. While reasonable effort was taken to ensure the information and analysis in this publication is accurate, it has been prepared solely for general informational purposes. There are no warranties or representations being provided with respect to the accuracy and completeness of the content in this publication. Nothing in this publication should be construed as providing professional advice on the matters discussed. The author does not assume any liability arising from any form of reliance on this publication.