Falling Gas Prices Fuelled Inflation’s Deceleration in October

Canadian Economics

  • In October, the Consumer Price Index (CPI) rose by 3.1 per cent (y/y). This was lower than September’s 3.8 per cent (y/y) increase.
  • Gasoline prices fell by 6.4 per cent (m/m) and were 7.8 per cent lower than a year ago. Year-over-year, food prices increased in stores (+5.4 per cent) and restaurants (+5.7 per cent).
  • Core CPI (excluding food and energy) grew by 3.4 per cent in October (y/y), higher than the 3.2 per cent increase (y/y) in September. Higher prices in several shelter and food subcategories were key to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI fell by 0.1 per cent in October (following a 0.1 per cent increase in September).
  • The average of the Bank of Canada’s three core inflation measures fell to 3.8 per cent in October from 4.0 per cent in September. CPI-common fell to 4.2 per cent, CPI-median dropped to 3.6 per cent, and CPI-trim inched down to 3.5 per cent.

Key insights

Inflation took a step down in October, though it has likely reached its cruising altitude. We expect that year-over-year CPI growth will hover around its current level for the next several months. Gasoline prices fell in October, driving much of the decline in year-over-year price growth. Food price growth also continued to decelerate. Mortgage interest cost growth remained aloft, while rental price increases accelerated to 8.2 per cent (y/y). Year-over-year services price growth (which is often related to wage growth) also accelerated to 4.6 per cent.

The Bank of Canada’s next move could be a rate cut – but not in December. The Bank opted to hold interest rates steady for a second time last month. With price growth continuing to ease, monetary policy is likely restrictive enough. Although it’s not yet time to declare victory against inflation, Governor Macklem has indicated that the Bank could start to loosen monetary policy even before price growth reaches the 2 per cent target. Most of the factors that the Bank is watching continue to ease. The Bank’s core inflation measures took a step down again in October. Inflation expectations remained elevated but continued to ease in the third quarter of 2023.

But there are hazards on the road ahead. The Bank reiterated its position that it is willing to raise rates again if inflation proves to be more persistent than expected. Importantly, they noted “progress towards price stability is slow and inflationary risks have increased.” Elevated wage growth (up 4.8 per cent year-over-year in October) remains a concern. Corporate pricing behaviour, too, remains atypical. Governor Macklem recently pointed out that strong government spending growth next year will add to demand more than supply is growing, which could add to inflationary pressures. This is especially pertinent as the federal Fall Economic Statement is released later today. But overall, October’s inflation report is encouraging. Seasonally adjusted price growth has been nearly flat for the past two months, suggesting that the medicine of monetary policy is working.

An aerial view of a highway interchange in late evening sunlight

For more details about our inflation forecast and inflation’s impact on the Canadian economy, please consult our Canadian Five-Year Outlook.