Inflation Decelerated Further in September

  • In September, the Consumer Price Index (CPI) rose by 1.6 per cent (y/y). This was lower than August’s 2.0 per cent (y/y) increase.
  • Gasoline prices fell by 7.1 per cent (m/m) and were 10.7 per cent lower than a year ago. Year-over-year, food prices increased in stores (+2.4 per cent) and restaurants (+3.5 per cent).
  • Core CPI (excluding food and energy) grew by 2.4 per cent in September (y/y), which was the same as in August. Several shelter components were key contributors to overall CPI growth.
  • On a seasonally adjusted monthly basis, the CPI was unchanged in September (following a 0.1 per cent gain in August).
  • The average of the Bank of Canada’s two preferred core inflation measures remained at 2.4 per cent in September. CPI-median remained at 2.3 per cent, while CPI-trim was static at 2.4 per cent.

Key Insights

Inflation decelerated further in September, dropping below the Bank of Canada’s 2 per cent target. Lower prices for gasoline relative to the same month last year were largely responsible for the weaker pace of price growth. Yet, price pressures have decelerated unevenly. The Bank’s core inflation measures remained the same in September as they were in August, as did the CPI excluding food and energy. Shelter costs remain a sticking point. Rent costs, for example, rose by 8.2 per cent (year-over-year) in September. Fortunately, this was a slightly slower pace than in August. The pace will slow further (though gradually) as base year comparisons to last year fall out of the inflation calculation and as the pace of population growth slows and housing demand pressure eases.

Downside risks to the inflation outlook are gaining traction. Gas price fluctuations are largely responsible for dragging inflation below the Bank of Canada’s 2 per cent target. However, the Bank estimates that the economy remains in state of excess supply where productive capacity is greater than demand. In this context, broad price pressures tend to fall. The Bank is still aiming for a soft landing where economic growth isn’t unduly impaired by its recent monetary tightening cycle. But monetary policy remains in a contractionary range which, if maintained for too long, could sap demand further and drag inflation persistently below the 2 per cent target. While upside risks remain, these appear to be waning. Elevated wage growth, for example, could keep the pace of price growth elevated for some services. However, nearly two-thirds of businesses expect wage adjustments to fall within their normal historical range over the next 12 months. On balance, further rate cuts are imminent.

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

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