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

On Tuesday, Statistics Canada reported that the country's annual inflation rate had risen to two per cent in October, and the number nudged expectations about what the Bank of Canada will do next month. A half-point cut had been a live possibility. A quarter-point cut now looks somewhat more likely.

The agency said prices rose at a faster yearly pace in five of the eight major components of the consumer price index. One big reason for the uptick in the headline figure was gasoline. Pump prices were still lower than a year earlier, but they fell by less in October than they had in September.

The move was not a shock. Inflation had dropped to 1.6 per cent, and the Bank of Canada had said it expected price growth to bounce back after that. Last month the central bank cut its key interest rate by half a percentage point, responding to the plunge in inflation. The rate now stands at 3.75 per cent. Even so, BMO chief economist Douglas Porter called the report a "mild disappointment." In his words, it reminds us that this is not just a one-way trip lower for inflation.

CIBC senior economist Katherine Judge struck a similar note in a client note. Price pressures, she wrote, accelerated by more than expected in October, a step back for the Bank of Canada, though one that follows a string of reports that were steps forward.

The central bank is still expected to keep cutting in the coming months, December included. What remains open is the size. Porter, who expects a quarter-point cut, said Tuesday's report firms up that view. He argued the economy is still chugging along, the unemployment rate has stopped rising for a couple of months, and underlying inflation has backed up a little. In his view, the urgency to cut by 50 basis points is not there. He also warned that a larger cut would be imprudent while the U.S. Federal Reserve signals caution.

That caution is visible south of the border. American inflation also ticked up in October, to 2.6 per cent from 2.4 per cent in September. Fed Chair Jerome Powell said last week that the Fed will likely cut slowly and deliberately, partly because inflation has shown signs of persistence and officials want to see where it goes next.

Within the Canadian numbers, the picture was mixed. Rate cuts have helped ease shelter costs, as mortgage interest costs decelerate. 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, by contrast, rose six per cent, the fastest annual pace since 1992, up from 4.9 per cent in October 2023. Grocery prices climbed faster too, up 2.7 per cent from a year ago. The Bank of Canada's preferred core measures, which strip out volatile prices, also picked up again.

The central bank will weigh all of this, along with new gross domestic product data and the November jobs report, before its announcement on Dec. 11. That decision will settle whether the next cut is a quarter point or something larger.