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24 Oct

Encouraging Inflation Outlook Suggests Policy Rates Have Hit Their Peak


Posted by: James L James

Canadian Inflation Falls to 3.8%, Holding BOC’s Interest Rate Decisions Steady

In September, the inflation report brought positive news as it surpassed expectations, indicating the end of a three-month upward trend in inflation. Both headline and core inflation rates on a year-over-year and three-month moving average basis decreased, suggesting that the 5% overnight policy rate might have peaked. While rate cuts are not expected until the middle of the next year, it appears that the most severe phase of the tightening cycle has passed. Gasoline price increases offset the overall inflation deceleration, and the outlook for October’s Consumer Price Index (CPI) is favorable, although uncertainties stemming from the Middle East conflict linger.

On a monthly basis, the CPI dipped by 0.1% in September, primarily due to lower gasoline prices. Goods inflation fell by 0.3% from the previous month, marking the first such decline since December 2022, with a year-over-year growth of 3.6%. Meanwhile, services inflation remained unchanged compared to August, the first time it didn’t rise monthly since November 2021, with a yearly rate drop from 4.3% to 3.9%. Durable goods prices decelerated, with notable changes in categories like new passenger vehicles, furniture, household appliances, and air transportation costs.

In summary, the September inflation report presents a positive outlook with a decrease in inflation rates, possibly indicating the culmination of the tightening cycle. Gasoline prices and a favorable base effect for October’s CPI play essential roles. However, uncertainties arising from the Middle East conflict persist. While the Bank of Canada may aim to bring inflation back within its 2% target range next year, they are expected to proceed cautiously and consider rate cuts only in the middle of next year, as they assess the full effects of previous rate hikes.

Published by Sherry Cooper