Canada's Inflation Climbs Back to 2%, Dimming Odds of a Jumbo Rate Cut

Canada's annual inflation rate rose to two per cent in October, Statistics Canada reported Tuesday, nudging expectations toward a smaller interest rate cut from the Bank of Canada next month.

The agency said prices rose at a faster yearly pace in five of the eight major components of the consumer price index. A large part of the uptick in the headline number came from 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 figure up.

The move was not a shock. The Bank of Canada cut its key interest rate by half a percentage point last month after inflation dropped to 1.6 per cent, and it had acknowledged then that price growth would probably bounce back up. Still, BMO chief economist Douglas Porter called Tuesday's 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 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.

With inflation sitting near the bank's two per cent target, more cuts are still expected in the coming months, including in December. The key rate now stands at 3.75 per cent. How big the next cut will be depends on how the bank reads the incoming data, including the October inflation figures. Forecasters like Porter, who were already calling for a quarter-point move, say the 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 crept back up. In his assessment, the urgency to cut by 50 basis points is not there.

The bank's preferred core measures of inflation, which strip out volatile prices, also picked back up last month.

The details show where pressure is easing and where it is not. Falling mortgage interest costs, a result of the bank's earlier rate cuts, are taking some heat out of shelter inflation. Rent is still climbing, but more slowly: up 7.3 per cent from a year ago, compared with 8.2 per cent in September. Property taxes and other special charges, however, rose six per cent, the fastest annual pace since 1992 and up from 4.9 per cent in October 2023. Grocery prices accelerated too, rising 2.7 per cent from a year earlier.

The backdrop south of the border points the same way. U.S. inflation also ticked up in October, to 2.6 per cent from 2.4 per cent in September. Federal Reserve Chair Jerome Powell said last week that the Fed will likely cut slowly and deliberately, in part because inflation has shown signs of persistence and officials want to see where it heads. Porter warned that a larger Canadian cut would not be prudent while the Fed signals caution.

Before its announcement on Dec. 11, the Bank of Canada will have two more pieces of evidence to weigh: new gross domestic product data and the November jobs report. Those, along with this week's inflation numbers, will decide whether the next move is a quarter point or something larger.