Canadian consumer prices rose by 0.7% in October, slightly missing the consensus estimate of 0.8% MoM. The strong increase in prices offset the base effect drag, leaving the headline figure unchanged at 6.9% YoY, in line with economists’ median expectation.
Among the Bank’s favoured core measures, all three ticked up in YoY terms. The largest increase occurred in the core common measure, but given its recent track record of significant revisions, even the Bank of Canada’s own research team has suggested that the measure is currently unreliable. In other core metrics, such as the standard CPI ex food and energy measure, underlying inflation has moderately cooled. But given the middling nature of today’s report which is the last of its kind before December’s BoC meeting, the debate over another 50bp hike or a consecutive deceleration to 25bp will remain alive in our view. This places the emphasis on the remaining data points before the December 7th meeting where November’s payrolls report on December 2nd stands out.
On top of the incoming data, the lack of conclusive evidence in today’s CPI report will lay bare the Bank’s sensitivities over financial stability risks and economic growth at December’s meeting.
Given the BoC pointed to these risks back at the October meeting in explaining their decision to decelerate to a slower pace of hiking and the overnight rate already sits in restrictive territory at 3.75%, we think the likeliest option is for the BoC to decelerate further with a 25bps hike. The act of doing so would usher in a new “fine tuning” phase in the hiking cycle; a view shared within money markets where the risk of a 50bp hike is assigned just a 40% probability.
Looking at the composition of the report, the bulk of the increase in the CPI stemmed from a 9.2% increase in gasoline prices, which accounted for over half of the total increase.
With alternative data from GasBuddy showing a slight decrease in gasoline prices in November, we’re likely to see a weaker inflation print next month, which supports our view that the Bank of Canada can step back down to 25bps in December.
Shelter costs increased by 0.8%, accelerating from last month on higher mortgage interest charges (+11.4%). This is a direct reflection of the Bank of Canada’s interest rate hikes; higher rates raise inflation in the near-term when demand is more inelastic, but lower inflation over the longer term as households adjust their consumption demand, especially in housing and durable goods.
Food prices rose by 0.2% in October, reverting to a normal pace of growth following months of excessive inflation. On a year-over-year basis, food costs have gone up by 10.1%, making it one of the key drivers of this year’s inflation, but the downshift in the pace of growth is a welcome development for Canadians.
In financial markets, the probability of the BoC conducting another outsized 50bp hike at the end of year edged up slightly from 33% to 40%, but this had little impact on the loonie as it continues to trade on broader risk conditions in markets seeing as the CPI report lacked conclusive evidence in settling the rate debate.
In our view, with the Canadian economy showing lacklustre growth, consumer debt at excessive levels, and the housing market already showing the impact of tighter monetary policy, a second 50bp hike from the BoC is unlikely to be seen as supportive of CAD given the impact it will have on increasing left tail risks for the economic outlook.
CPI ex food and energy (3 month moving average annaulised) continued to fall in October, suggesting there is cover for Governor Macklem to guide to an even slower pace of tightening in December
Simon Harvey, Head of FX Analysis
Jay Zhao-Murray, FX Market Analyst