Economic commentary provided by Alberta Central Chief Economist Charles St-Arnaud.
Bottom line
Inflation eased to 2.2% in October, mostly due to lower food and gasoline prices. Moreover, the Bank of Canada’s preferred measures of core inflation eased to 2.95% on average. It is the first time since June that the BoC’s preferred measures of inflation is below 3%, the upper band of the inflation target.
The breadth of inflationary pressures was mixed in October. The share of components of CPI rising by more than 5% rose to 21%, the highest since February 2024, while the share of components increasing by more than 3% eased to 33% from 37%. We note that the shares of components increasing by more than 3% and 5% are above historical norms (see Fig. 1) and is higher than during periods when inflation is at target.
The recent trend in CPI’s monthly changes suggests that the momentum in inflationary pressures was unchanged in October, and the 3-month annualized changes of half of the main CPI components are above 3% (see Fig. 2), with the 3-month annualized change in headline CPI is at +3.0%.
The momentum of BoC’s core measures was eased slightly to 2.6% in October (see Fig 2). The core inflation momentum below 3% suggests that the stickiness in core measures and price pressures are consistent with the BoC’s inflation target. However, we note that the momentum in some alternative measures of core inflation have moved above 3%, with CPI excluding the 8 most volatile components and indirect tax at 3.3% and CPI excluding food and energy at 3.3%.
Overall, the report suggests that headline inflation remains well within the inflation target. Moreover, we are seeing greater convergence in the various measures of core inflation. As such, the CPI-median and CPI-Trim eased to 2.9% and 3.0%, respectively, while CPI excluding food and energy and CPI excluding the 8 most volatile items rose to 2.7% and 2.9%, respectively. This suggests that underlying inflation is likely marginally below 3% and the recent dynamics suggest that it could remain sticky around that level in the coming months.
Overall, there is nothing in today’s report that would raise the BoC’s level of concern regarding inflation. Headline inflation is moving closer to the mid-point of the inflation target, while various measures suggest underlying inflation is slightly below 3%. With this in mind and the BoC signaling that it is comfortable with the current level of the policy rate, a cut at the December meeting is unlikely. However, it is unclear whether the easing cycle is over. As such, a deterioration of the labour market could lead to further cuts. Moreover, as we mentioned on a number of occasions, the sharp slowdown in population growth is a drag on potential growth, lowering the neutral rate in the medium term. As a result, the neutral rate could be below the BoC’s estimated range, meaning that the current 2.25% for the policy rate could become mildly restrictive.
In Alberta, inflation accelerated to 1.8% in October. Higher food prices (+3.7% y-o-y) and shelter costs (+2.8% y-o-y) continued to be the main source of inflation, while energy costs (-12.9% y-o-y) were no longer a drag. Inflation excluding food and energy (a core inflation measure) rose to 2.9% and was only marginally above the national measure.
The Consumer Price Index (CPI) increased 0.2% m-o-m non-seasonally-adjusted in October and the inflation rate decelerated to 2.2%. A growth in shelter, household operations, furnishing and equipment, and clothing and footwear were the main sources of price increases in September, while lower transportation costs were the main source of price decreases for the month.
On a year-on-year basis, six CPI components decelerated in October.
Food price inflation fell to 3.4% y-o-y, removing 0.6pp to inflation. Most of the deceleration is due to a price decrease in the preparation of vegetables and processed food.
Transportation costs were a higher drag on inflation, with prices decreasing 0.7% y-o-y in October compared to 1.5% in September. Transportation costs reduced inflation by 0.1 percentage points (pp) in October. The decrease was mainly due to lower crude oil prices.
Shelter cost inflation eased to 2.5%, the lowest since March 2021, contributing 0.7pp to headline inflation. This was mainly due to lower owned accommodation (contributing 0.4pp), and mortgage interest costs (+2.9% y-o-y), contributing -0.2pp.
In October, goods price inflation reduced to +0.9% y-o-y and service price inflation rose to 3.2% y-o-y. Energy prices were 6.5% lower compared to the same month last year, as the removal of the Carbon Tax in April means lower energy price levels. Excluding food and energy, prices rose 0.7% m-o-m in October and increased to 2.7% 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, increased to 2.9% in October.
Looking at the BoC’s core measures of inflation, they slightly decreased in October but remained at the upper end of the BoC’s inflation target. CPI-Trim fell to 3.0%, CPI-Median fell to 2.9%. As a result, the average of the two measures eased marginally to 2.95% from 3.10%, under 3% target for the first time since June.
By provinces, headline inflation was the highest in Quebec (3.2%), Manitoba (3.0%), Nova Scotia (2.6%), Saskatchewan (2.3%), while it was the lowest in PEI (1.4%), Alberta (1.8%), Ontario (1.8%), BC (2.0%) and Newfoundland (2.0%).
Core inflation, or CPI excluding food and energy, is highest in Nova Scotia (3.4%), Manitoba (3.4%), Quebec (3.2%), and Saskatchewan (3.0%). It was the lowest in PEI (1.6%), Newfoundland (2.2%), BC (+2.3%), and Ontario (+2.3%).
In Alberta, prices rose 0.5% m-o-m and inflation eased to 1.8% in October. Only three out of eight CPI components decelerated on the month. Food prices inflation eased to 2.8% y-o-y from 3.7% y-o-y and remained the main source of inflation, contributing 0.5pp to inflation.
Shelter costs accelerated to 1.8% y-o-y and remained one of the main sources of inflation, contributing 0.5pp. The details show that higher rented accommodation costs (+3.5% y-o-y) due to rent, owned accommodation costs (+2.4%) due to insurance and property tax costs were the main source of inflation in this component. These increases were partly offset by lower utility cost (-5.1% y-o-y).
Transportation costs increased 1.4% y-o-y in October, despite gasoline prices being lower by 14.0% y-o-y, as due to rising motor vehicle insurance premium (+17.8% y-o-y) and higher cost of purchasing and leasing (+4.0% y-o-y). The component contributed 0.1 percentage points to inflation.
Household operations, furnishing and equipment continued to accelerate and reached 3.2% y-o-y in October, with communication costs being the main driver. The sector contributed 0.4 percentage points to inflation.
Goods price inflation was 0.0% y-o-y in October after +0.8% y-o-y in September. Services price inflation rose to 3.3% y-o-y from 2.9% y-o-y in September. Inflation excluding food and energy increased to 2.9%, only slightly above the national measure. Energy costs remained a drag at -12.9% y-o-y compared to -9.8% y-o-y in September, mainly due to the removal of the carbon tax and lower gasoline prices in October.
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Independent Opinion
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