Canada CPI Preview: Forecasts from fivesix major banks, inflation to decelerate further

We look for CPI to fall 0.7pp to 3.1% YoY on a sharp swing in the contribution from energy products as prices hold unchanged MoM. Gasoline prices will exert a sharp drag on the month but a tepid rebound in core goods and ongoing strength in shelter should help offset this. We should also see more progress across core measures with CPI-trim/median edging lower to 3.6% YoY.

YoY CPI growth is expected to slow significantly to 3.1% in October (just above the top end of the BoC’s 1% to 3% inflation target range) from 3.8% in September. A drop in gasoline prices pushed energy costs lower and the lagged impact of easing supply chains and lower food commodity prices continue to slow grocery store price growth. There is not much that the BoC can do to impact global commodity prices, and price growth excluding food and energy products is expected to be ‘stickier’, edging up to 3.3% YoY from 3.2% in September.

The drop in gasoline prices may have limited the increase of the headline index to 0.2% during the month before seasonal adjustment. If we’re right, the 12-month rate of inflation should come down from 3.7% to 3.2%. Similarly to the headline print, the core measures preferred by the Bank of Canada should have eased, with CPI-med likely moving from 3.8% to 3.6% and CPI-trim from 3.7% to 3.6%.

Lower gasoline prices, on both a MoM and YoY basis, will be the main driver of weaker consumer prices in October. The 0.1% decline in unadjusted prices in October (-0.2% seasonally adjusted) would see the annual rate of inflation slow to 3.0%, which would be the lowest reading since June. Food price inflation should also continue to ease, even though prices are still expected to be up modestly on the month. In contrast, ex food/energy prices could look a little firmer than in the prior month, with a 0.3% seasonally adjusted increase expected. That said, this increase is still anticipated to be more narrowly based than the inflation we were seeing in the first half of the year, with mortgage interest costs and rental prices the main contributors. The Bank of Canada’s preferred trim and median measures of inflation are expected to decelerate further on both a year-over-year and a 3-month annualized basis.

Canada’s headline CPI should ease further in October, remaining flat on the month and dropping to 3.1% YoY. Weaker energy prices should be a large factor leading to softer CPI in October. Many components of shelter inflation should remain on the strong side, however, including another solid increase in rents. But a further decline in new home prices in September and weaker existing home prices in October suggest the shelter components more closely related to house prices could be somewhat softer this month. The most important element of any CPI report, as it has been for many months, will be the path of core inflation with anecdotal data suggesting an easing in annual core inflation should be more evident sometime in H1 next year. The more conservative CFIB decline could suggest the 3-month pace of core inflation falling below 3.5% sometime in the next few months.

A favorable outcome for October CPI would support the case for a continued policy rate pause and a probable policy rate peak. A combination of lower energy prices during October as well as favorable base effects should see headline inflation slow sharply to 3.2% YoY in October from 3.8% in September. Equally important, central bank policymakers and market participants will be looking for the pace of core inflation to slow as well. The average of the central bank's core inflation measures slowed to a three-month annualized pace of 3.67% in September. Should that metric shift down to a 3.0%-3.5% range for the October reading, we believe that would strengthen the case that the policy rate peak has already been reached. A moderate deceleration of inflation along those lines would also, we think, keep the BoC on course to begin lowering its policy interest rates from around the middle of next year.