Market Wire: Canadian Inflation Surprises, Lifting Rate Expectations

Canadian inflation slowed by less than expected in September, raising the odds on a 75 basis point move at next week’s Bank of Canada meeting. Data released by Statistics Canada this morning showed consumer prices rising 6.9 percent year-over-year in September, with the month-over-month increase amounting to 0.1 percent, beating expectations for a -0.1 percent decline. Annual inflation peaked at 7.6 percent in July, and fell to 7 percent in August. 

Core inflation, computed as the average of the three price measures preferred by the Bank of Canada (trim, median, and common), increased an annualized 5.3 percent - roughly unchanged relative to August’s revised number, and flat against market expectations. Core measures strip out highly-volatile categories, and are often used to develop a better understanding of price pressures in the underlying economy. 

For a third consecutive month, gasoline prices dropped, down 7.4 percent on a monthly basis after tumbling 9.6 percent in August. 

Prices for food purchased from stores were up 11.4 percent relative to the prior year, the fastest year-over-year increase since August 1981. 

The statistical agency noted, “Average hourly wages rose 5.2 percent on a year-over-year basis in September, meaning that, on average, prices rose faster than wages. The gap in September was larger compared with August.”

Services inflation climbed, up 5.6 percent year over year, and mortgage interest costs kept rising, squeezing household budgets. 

The loonie is trading higher, with implied pricing suggesting the Bank of Canada is now considered slightly more likely to opt for a 75 basis point move next week.