Canadian inflation is decelerating again, leaving room for the central bank to hold interest rates steady next week.

The consumer price index rose 3.8% in September from a year ago, Statistics Canada reported Tuesday in Ottawa, slower than the median estimate of 4% in a Bloomberg survey of economists. It’s a reversal that comes at the right time for Bank of Canada policymakers, who will soon begin their deliberations for a rate decision on Oct. 25.

Governor Tiff Macklem and his officials paused rate increases in early September, saying they wanted to see how the economy evolved. A surprise second-quarter economic contraction and employment losses in July had allowed them to look past an early-summer uptick in inflation.

But then the headline rate of inflation rose again in August and the economy added 104,000 jobs over August and September, while wage growth for permanent employees accelerated. That prompted some economists and traders to speculate that another hike was imminent.

That pressure appears to be off, for now.

Traders in overnight swaps pared their bets on another rate increase next week, falling from around 50% odds to less than 20%. Bonds rallied; the loonie fell sharply after the data release before rebounding.

“The level of inflation remains much too high for comfort, but the trend is the BOC’s friend here,” Benjamin Reitzes, a rates and macro strategist at the Bank of Montreal, said in a report to investors. “Given that inflation is the most lagging of indicators, and the economy is clearly weakening, we’re likely to see ongoing disinflationary pressure.”

“There’s no need for further rate hikes in Canada,” he added.

On a monthly basis, the consumer price index fell 0.1% in September, versus expectations for an increase of 0.1%.

Two key yearly inflation measures that are tracked closely by the Bank of Canada and filter out components with more volatile price fluctuations — the so-called trim and median core rates — also eased, averaging 3.8%, from 4% a month earlier.

A three-month moving average of underlying price pressures that Macklem has said policymakers are tracking fell to an annualized pace of 3.67%, from 4.29% a month earlier, according to Bloomberg calculations.

The unexpected deceleration in inflation doesn’t fully offset the upside surprises of the past few months, said Andrew Grantham, an economist with Canadian Imperial Bank of Commerce.

“However, with activity in the economy stalling in Q2 and Q3, excess demand appears to be diminishing, suggesting that inflation should continue to decelerate in the quarters ahead without the need for further interest rate hikes.”

On Monday, the central bank’s surveys showed that both businesses and consumers believe the full impact of rate hikes has yet to be felt, though inflation expectations remain elevated.

Federal Reserve policymakers are also grappling with a public view that inflation will stay well above the central bank’s target. Americans expect prices to climb at a 3.8% rate over the next year, the highest in five months, according to a survey reading from the University of Michigan. The US inflation rate was 3.7% in September, above its level in June and July.

Services Inflation

In September, the year-over-year deceleration in inflation was broad, stemming from lower prices for some travel-related services and durable goods. Food price increases slowed. On a monthly basis, the slowdown was driven by lower gasoline prices, Statistics Canada said. Air travel costs were also down.

Goods prices fell 0.3% from a month earlier, the first such decline since December, and rose 3.6% from a year ago. The services CPI was unchanged from August, the first time it hasn’t grown on a monthly basis since November 2021, while the yearly rate slowed to 3.9%, from 4.3% in August.

Overall, prices rose at a slower pace on a yearly basis compared with August in six of 10 provinces. The rate of inflation was higher in Newfoundland and Labrador, Nova Scotia, New Brunswick and Quebec — provinces that saw outsized increases in gasoline prices.

“The slower increase in Canadian consumer prices in September was a step in the right direction,” Claire Fan, an economist at Royal Bank of Canada, said in a report to investors. “With more easing in inflation readings expected in the months ahead, we expect the Bank of Canada to stay on pause through the rest of the year.”

--With assistance from Erik Hertzberg and Danielle Bochove.

(Updates with more context and commentary beginning in the third paragraph.)

Author: Randy Thanthong-Knight