Canada's Inflation Climbs Back to 2%, Dimming Hopes for a Jumbo Rate Cut

On Tuesday morning, Statistics Canada released its October consumer price index, and the headline number landed exactly where the Bank of Canada wants it: two per cent. The path there mattered more than the figure itself. Inflation had dropped to 1.6 per cent in September, and the October reading marked a climb back up that nudged expectations toward a smaller interest rate cut next month.

According to the agency, prices rose at a faster annual pace in five of the eight major components of the index. The biggest single driver of the headline uptick was gasoline. Pump prices were still lower than a year earlier, but they fell by less in October than they had in September, which pushed the overall rate higher.

Douglas Porter, chief economist at BMO, said the rise was not a major surprise but still amounted to a mild disappointment. In his words, it reminds us that this is not just a one-way trip lower for inflation. Katherine Judge, a senior economist at CIBC, wrote in a client note that prices accelerated by more than expected, a step back for the central bank, though one that follows a string of reports that were steps forward.

The Bank of Canada had in fact warned this might happen. Last month it cut its key rate by half a percentage point, a so-called jumbo cut, in response to plummeting inflation, while acknowledging that price growth would likely jump back up after falling to 1.6 per cent. The policy rate now stands at 3.75 per cent. The central bank is still expected to keep cutting in the coming months, including in December. What remains open is the size of that cut, which will depend on how policymakers read the incoming data, October's inflation numbers among it.

Forecasters who were already expecting a quarter-point move, Porter among them, say the report firms up that call. He pointed to an economy that is still chugging along, an unemployment rate that has stopped rising for a couple of months, and now a bit of a backup in underlying inflation. The urgency to cut 50 basis points, he said, is really not there. He also cautioned that a larger cut would not be prudent while the U.S. Federal Reserve signals caution. American inflation also ticked up in October, to 2.6 per cent from 2.4 per cent in September, and Fed Chair Jerome Powell said last week that the Fed will likely cut slowly and deliberately, in part because inflation has shown signs of persistence.

Inside the Canadian figures, the picture was mixed. The Bank of Canada's preferred core measures, which strip out volatile prices, picked back up. Shelter costs, though, showed the effect of earlier rate cuts as mortgage interest cost growth slowed. Rent rose 7.3 per cent from a year earlier, down from an 8.2 per cent annual gain in September. Property taxes and other special charges rose six per cent, the fastest annual pace since 1992, up from 4.9 per cent in October 2023. Grocery prices accelerated too, up 2.7 per cent from a year ago.

Before the bank's Dec. 11 announcement, policymakers will also have new gross domestic product data and the November jobs report to weigh. Those two releases, alongside October's inflation, will shape whether the next cut is a quarter point or something larger.