Canada’s inflation rate unexpectedly climbed back to 2.0% in October 2024, driven by a smaller decline in gasoline prices and rising grocery costs. This marks the first increase in the annual inflation rate since May, aligning with the Bank of Canada’s forecasts and curbing market expectations for a significant rate cut next month. The news has shifted financial market dynamics and could influence upcoming decisions on monetary policy.
Key Highlights from October’s Inflation Data
- Annual Inflation: Rose to 2.0% from 1.6% in September.
- Monthly Consumer Price Index (CPI): Increased by 0.4%, beating market predictions of 0.3%.
- Gasoline Prices: Declined 4% annually, a smaller drop than September’s 10.7%.
- Excluding Gasoline: Inflation held steady at 2.2% for the third consecutive month.
- Grocery Costs: Store-bought food prices surged by 2.7%, outpacing overall inflation for the third straight month.
Implications for Interest Rates
This inflation spike comes just weeks before the Bank of Canada’s interest rate decision on December 11, 2024. The data dampened hopes for a 50-basis-point rate cut, with markets now assigning only a 26% probability, down from 37% before the release.
Economists suggest the bank may opt for a smaller, 25-basis-point cut, citing continued underlying price pressures. However, upcoming GDP data (November 29) and employment figures (December 6) will also play a critical role in shaping the central bank’s decision.
What’s Driving Inflation?
- Gas Prices: While still lower than last year, smaller annual declines in gas prices contributed to the rise in inflation.
- Core Inflation Measures: CPI-median increased to 2.5%, and CPI-trim rose to 2.6%, indicating persistent underlying price pressures.
- Grocery Prices: Accelerated to 2.7%, reflecting the rising cost of food at stores, which continues to outpace headline inflation.
Market Reactions
- Canadian Dollar: Strengthened by 0.19% to 1.3989 CAD per USD.
- Government Bonds: Yields on two-year bonds fell 2.1 basis points to 3.206%.
- Monetary Policy: Analysts predict cautious action from the Bank of Canada, with the possibility of further rate cuts contingent on upcoming economic data.
What’s Next?
The Bank of Canada has already lowered its policy rate by 125 basis points across the last four policy meetings, including a 50-basis-point cut in October. Future moves will depend on whether GDP and unemployment data support or contradict this month’s inflation report.
Economists note that while inflation is climbing, underlying price pressures may still be receding. If economic growth or jobs data show further softening, policymakers could opt for more aggressive monetary easing.
References
- Statistics Canada October 2024 CPI Data: Statistics Canada
- Ratehub.ca Economic Insights: Ratehub.ca
- Reuters Analysis of Inflation and Monetary Policy: Reuters
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