Higher gasoline prices lift inflation, while softer labour markets and declining rates support future easing
Canada’s inflation rate is expected to rise slightly for October, interrupting a recent streak of declines. However, economists said the modest increase is not a sign of reversal but rather a blip in a broader downward trend driven by easing economic pressures.
Economists polled by Reuters forecasted a rise in the consumer price index (CPI) to 1.9% in October, up from 1.6% in September. The projected increase follows a rebound in oil prices, which climbed from $65 to $75 per barrel during the month, driving up gasoline costs – a key factor in the inflation calculation.
“We're expecting headline to go back up to 2%, but just like how it dropped down to 1.6%, it's mostly an energy story,” said Claire Fan, an economist at RBC. She stressed that the underlying trend still points to easing inflation, despite October’s uptick. “The broad story really is that progressively easing inflation pressure is still very much the trend.”
Core inflation remains stable
Core inflation, which excludes volatile categories like energy and food, is expected to remain steady or decrease slightly. RBC projected core inflation to decline to 2.2%, down from 2.4% in September, while BMO forecasted it to hold around 2.4% to 2.5%.
Economists said that property taxes and shelter costs are contributing to core inflation pressures, but those influences may be offset by declining mortgage interest costs following the Bank of Canada’s October rate cut.
“October looks to be a bump in the road for the downward trend in inflation,” said Benjamin Reitzes, BMO’s managing director of Canadian rates and macro strategy. “Prices didn’t exactly surge in the month, but base effects are challenging, suggesting that headline and core inflation will accelerate modestly.”
Housing costs in flux
Housing-related costs remained a key area of focus. Elevated property taxes have been pushing shelter costs higher, though declining mortgage rates are beginning to ease some of the strain. The Bank of Canada’s latest rate cut, which brought the benchmark rate to 3.75%, marked the fourth reduction since June, helping to gradually reduce borrowing costs for homeowners.
On the rental side, inflation remained high, with rents rising at their fastest pace since the 1980s. Desjardins economist Maëlle Boulais-Préseault noted that rental inflation averaged 8.3% in Q3 2024, but she expects it to slow over time as population growth moderates and unemployment rises.
Diverging economies
Canada’s inflation dynamics differ significantly from those in the US, where robust government spending and a strong labour market pushed inflation higher to 2.6% in October.
A softer labour market and weaker population growth are expected to help keep inflation in check, though these factors have also contributed to downward pressure on the Canadian dollar, which is at its lowest level since 2020.
This economic divergence has created uncertainty around the Bank of Canada’s next move. BMO predicted a modest 0.25% rate cut in December, while RBC anticipates a more aggressive 0.5% reduction.
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“Given how weak current conditions are, and given the fact that even if you cut rates today, it won't help with things until probably at least a couple quarters down the road, they really want to front load any amount of easing,” Fan said. "If they think the economy needs the support, they want to do it as quickly as possible."
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