Canada: Core Inflation Drops Further In September

Canada’s consumer price index rose 0.2% in September leaving the year-on-year inflation rate unchanged at 1.2%. In seasonally adjusted terms, CPI also rose 0.2%, although just three of the eight broad categories saw increases. Higher prices for clothing/footwear (+0.1%), household operations and equipment (+0.2%), and transportation (the +0.9% print boosted by gasoline) were enough to offset price declines for shelter (-0.2%), food (-0.2%), health/personal care (-0.8%), recreation/education (- 0.3%), and alcohol/beverages (-0.1%). Core CPI also rose 0.2%, taking the year-on-year core inflation rate down three ticks to 1.3%, the lowest since June of last year (top chart).

In seasonally adjusted terms, core prices were flat in the month, leaving the 3-month annualized core rate at a very mild 1%. The latter could have been even softer were it not for the fact that it contains some food items. Excluding food and energy, prices are in fact declining on a 3-month annualized basis (middle chart). Looking at provinces, the annual inflation rate is above the national average in Atlantic Canada, Manitoba and Alberta, as well as Quebec (the uptick in the QST early this year explains the latter), while Ontario and BC are both lagging at just 0.7%.



OPINION: The CPI report confirms that inflation remains very tame in Canada. Slow economic growth and a strong Canadian dollar (bottom chart) are clearly helping restrain prices. With September's results, core CPI ended up well below the Bank of Canada's Q3 estimates, i.e 1.5% versus the BoC's 1.9% estimate. Canadian GDP is set for tepid growth in Q4 as well, with a soft domestic economy and weak trade keeping price pressures well under wraps. We're accordingly anticipating a downgrade in both inflation and growth forecasts in next week's Monetary Policy Report, and, to the very least, a tone down in the BoC's hawkish language.