As Bank of Canada Readies Its Next Rate Decision, Report Shows Consumer Price Growth Cooled in September

Insights

September’s consumer price index report bore some good news. Both headline and core inflation decelerated. The pace of food price growth also took a big step down and further deceleration may be in the cards in the short term. The federal government has demanded that Canadian food retailers act to control the pace of food price growth. Details on proposed remedies remain forthcoming but could be positive for struggling consumers. In September, the price of gasoline also edged down slightly from the previous month. However, gas remains more costly than at the same time last year, which added some pressure to headline inflation.

Businesses set prices and about half of them report that their pricing behaviour remains abnormal. In the Bank of Canada’s third-quarter business survey, firms also reported that cost pressures remain their most pressing problem. Higher costs will continue to be passed through to consumers, with many firms noting that they are still planning to make larger and more frequent upward price adjustments over the next 12 months. A recent speech from the Bank of Canada also highlighted the potential for a new psychology of price adjustment – one where prices change more frequently – to take hold. If prices change more often, this could keep inflation higher for longer as businesses attempt to swiftly pass on any cost increase. But some evidence suggests that competitive pressures are having more of an influence on price-setting strategies again and this could aid inflation’s decent.

Consumers expect that the inflation flight will be protracted. The Bank of Canada’s third-quarter consumer survey shows that one-year-ahead inflation expectations remain perched at about 5 per cent (compared to between 2 and 3 per cent before the pandemic). Perceptions of current inflation are even higher and the gap between these perceptions and actual inflation has grown. These circumstances could contribute to keeping wage demands elevated and around for longer. Indeed, wage expectations in the Bank’s latest survey ticked up to a survey high (though remained below 3%).

As the Bank readies its interest rate decision next week, its decision-makers will be happy to see core inflation falling. But among the data releases of the last few months, there may be enough to justify another rate hike. However, there are also signs that inflation’s virulence is moderating. Balancing the risks of monetary over- and under-tightening to vanquish inflation seldom involves treading on such a fine tightrope.