Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation accelerated to 2.0% in October, directly on the midpoint of the BoC’s inflation target. The acceleration was mainly the result of a smaller decline in gasoline prices compared to last year, higher clothing prices and a bigger increase in property taxes. The average of the Bank of Canada’s core inflation measures also increased, reaching 2.55%, and remained below 3% (the upper band of the inflation target) for eight consecutive months.
In addition, the breadth of inflationary pressures broadened slightly in September. The share of components of CPI rising by more than 5% edged higher to 14% from 11% and the share of components increasing by more than 3% rose to 27% from 26%. Both measures are in line with their historical norm (see Fig 1.). The decline in the share of components rising by 5% suggests more extreme upside price pressures in inflation.
The recent trend in CPI’s monthly changes also suggests that the momentum in inflationary pressures increased in October but remained consistent with inflation target. As such, we observe that the 3-month annualized changes in half of the main CPI components are below 3% (see Fig. 2), with the 3-month annualized changes in headline CPI at 1.5%.
However, the momentum of BoC’s core measures rose to 2.8% on average but remained below 3.0% for a ninth consecutive month (see Fig 2). This increase suggests some stickiness in the core measures and some slightly stronger price pressures in recent months. Nevertheless, the recent price dynamics remain consistent with the inflation target.
Overall, the Bank of Canada will likely be disappointed by the upside surprise in inflation, but it remains in line with its forecast from the October MPR, which shows inflation in 2024Q4 at 2.1%. The slight uptick in the breadth of inflationary pressures and in the momentum of core inflation suggest a slight increase in underlying inflationary pressures. However, they remain consistent with inflation within the target band. As we wrote earlier (see ), we continue to 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 should cut its policy rate by 50bp at the December meeting, but we also recognize that the uptick in inflation provides some ammunition to members of the Governing Council wishing for a more cautious approach.
In Alberta, inflation accelerated to 3.0% in October. An acceleration in transportation costs due to higher gasoline prices was the main source of higher inflation. In addition, shelter costs accelerated to 5.6% y-o-y, contributing 1.5pp to inflation due to a smaller decline y-o-y in electricity than in September. Food price inflation also accelerated and remained one of the main sources of inflation, adding 0.6pp to headline inflation. Inflation excluding food and energy (a core inflation measure) rose to 3.3%, remaining above the national measure and the highest amongst the provinces.
The Consumer Price Index (CPI) rose by 0.4% non-seasonally-adjusted in October and the inflation rate accelerated to 2.0%. This was above expectations. The increase in prices in October was mainly the result of higher property taxes (+6.0% m-o-m), clothing costs (+3.2% m-o-m) and travel tours (+5.3%).
On a year-on-year basis, five of the eight major CPI components accelerated in October. Shelter cost inflation eased to 4.8% from 5.0% and remained the main source of inflation, contributing 1.4pp to headline inflation, mainly due to higher rent (contributing 0.5pp) and mortgage interest costs (contributing 0.8pp). Moreover, higher property taxes pushed inflation higher by 0.15pp.
Transportation costs inflation rose to 0.2% from -1.5. This acceleration was due to a smaller decline in gasoline prices compared to last year (-4.0% y-o-y).
Clothing and footwear costs declined by 2.3% y-o-y, a slower pace compared to September, and remained one of the main drag on inflation, subtracting 0.1pp to the headline.
Food price inflation accelerated slightly to 3.0% 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 rose to 0.1% from -1.0%, while service price inflation eased to 3.6% from 4.0%, its lowest since February 2022. Energy prices are 3.5% lower compared to the same month last year, after declining 8.3 % y-o-y in September. Excluding food and energy, prices eased 0.5% m-o-m in October and increased by 2.3% 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 1.7%, still below the mid-point of the Bank of Canada’s operational target.
Looking at the BoC’s core measures of inflation, they all increased in October, but remained below 3%. CPI-Trim increased to 2.6% from 2.4% and CPI-Median rose to 2.5% from 2.3%. As a result, the average of the two measures rose to 2.55% from 2.35%, below 3% for eight consecutive months.
In Alberta, prices increased 0.5% m-o-m and inflation jumped to 3.0% in October, the highest of all provinces. Only seven out of eight CPI components accelerated on the month. Shelter costs accelerated, increasing 5.6% y-o-y compared to 4.2% y-o-y in September and remain the main source of inflation, contributing 1.5 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, and from higher property taxes (adding 0.16pp to inflation). On the flip side, rent costs decelerated slightly to 10.8% y-o-y (contributing about 0.6pp to inflation) and continue to rise faster than in any other province.
Food price inflation rose to 3.8% y-o-y from 3.2% and remained an important source of inflation in the province, contributing 0.6pp.
Transportation costs accelerated to 1.6% compared to last year, as a result of higher gasoline prices (+4.5% y-o-y).
Goods prices increased 1.2% y-o-y from -1.0% y-o-y, while services prices inflation eased to 4.5% y-o-y from 4.7%. Inflation excluding food and energy rose slightly to 3.3%, higher than the national measure and the highest of all provinces. Energy costs eased declined less than in the previous month, -2.5% y-o-y in October compared to -10.7% y-o-y in September.