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While Canadian inflation rose by more than expected in October, the details of the latest CPI report remain soft. We still think the BoC should cut by 50bps next month, albeit the decision now appears a closer call than it did earlier this morning.
Looking at the headline print, all-items inflation rose by 2.0% in the 12 months to October, up from 1.6% in September, and modestly exceeding the 1.9% reading expected by markets pre-release. Core-median and core-trim inflation also climbed, rising to 2.5% and 2.6% respectively, against consensus forecasts of 2.4% for both.
Given the BoC’s focus on the latter two indicators as a measure of underlying inflation, today’s data would at first glance seem to steer strongly in favour of the Governing Council slowing the pace of easing in December. Digging through the details of today’s data, however, we think the decision is less clear-cut.
Specifically, much of the jump in headline inflation is attributable to energy costs and property taxes. Policymakers should look through both in our view. The first of these is notoriously volatile and is usually discounted to some extent by the Governing Council. The second, which rose 6.02% in October, is a one-time change to the price level. While this in isolation only contributes 0.05% to the rise in headline CPI, we suspect that spillovers from this change are also of relevance. Looking at shelter costs more broadly, these jumped from 0.11% MoM growth in September, to 0.71% this month, the fastest rate of increase since October last year – the last time that property taxes were increased. In fact, the pattern of higher shelter inflation in October when compared to the month prior, has held in each of the last 10 years.
That said, we would note the tax rise on this occasion is historically large, and should also serve to weigh on housing demand, suppressing the growth rate of other shelter-related CPI components in the coming months.
Moreover, property taxes aside, other shelter components broadly continued to ease on an annual basis this month as large rises from 12 months ago continued to fall out of the YoY price growth calculation.
With downside risks looking ahead, and yet further disinflation in the pipeline due to base effects, we remain of the view that inflation risks are still skewed toward below target inflation.
This point is highlighted when zooming out, with inflation looking far from scary in our view. Headline price growth is exactly at the BoC’s 2% target, while today’s upside surprise still only leaves the all-items consumer price index matching the level seen in August, and below its July peak. Meanwhile, dispersion measures continue to point toward disinflation progress, in contrast to headline readings. The number of CPI components rising by more than 3% is almost unchanged this month relative to September.
Taken as a whole then, we are disinclined to write off prospects for a jumbo rate cut next month, a view that is seemingly shared.
Markets had priced in 36bps of easing before year-end pre-release, this has now fallen to 33bps. The emphasis is now on jobs data early next month – the last major release before the BoC delivers its final rate decision of the year.
We continue to see downside risks to the print, given our longstanding bearish view of the Canadian economy, with corresponding upside risks for USDCAD as well.
Author:
Nick Rees, Senior FX Market Analyst