(Bloomberg) -- Inflation in Canada rose by more than forecast and underlying price pressures reaccelerated, hiccups that may dissuade policymakers from a second straight 50 basis-point cut to interest rates next month.
The consumer price index rose 2% in October on a yearly basis, up from a 1.6% increase a month earlier, Statistics Canada reported Tuesday in Ottawa. That’s slightly faster than the median estimate of 1.9% in a Bloomberg survey of economists.
On a monthly basis, the index ticked up 0.4%, versus expectations for a 0.3% gain. It increased 0.3% on a seasonally adjusted basis.
The central bank’s two preferred core inflation measures also accelerated, averaging a 2.55% yearly pace, faster than expectations and up from 2.35% a month earlier. A three-month moving average of those measures rose to an annualized pace of 2.8%, from 2.1% in September, according to Bloomberg calculations.
After the release, traders in overnight swaps trimmed their bets for a second consecutive rate cut to about one in three, from a little less than a coin flip previously. The Canadian dollar gained as much as 0.3% after the report to trade at $1.3976, while government bond yields pared declines.
The first acceleration of headline inflation in five months may bolster a stance for the Bank of Canada to reduce borrowing costs gradually, after officials stepped up the pace of easing in October with a half percentage point cut. The next and this year’s final rate decision is on Dec. 11.
Still, Tuesday’s inflation print won’t eliminate bets for bigger rate cuts. That’s because the central bank had already expected a bump along the road, with consumer prices hovering around 2%, as policymakers keep cutting rates to boost economic growth.
When Governor Tiff Macklem and his officials cut the key policy rate by 50 basis points last month, they said they want to see stronger growth and a pick up in demand. Preliminary data for third-quarter output point to about 1% annualized growth, compared with the central bank’s 1.5% estimate. Final third-quarter gross domestic product data is due at the end of this month.
October’s price gains were also driven partly by short-term pressures including municipal property taxes — which rose by most since 1992 — and gas prices.
Excluding gasoline, the consumer price index rose 2.2%, matching the rate in August and September.
Charles St-Arnaud, chief economist at Alberta Central, said he still believes the Bank of Canada should cut by 50 basis points in December, even though Tuesday’s release reduced the likelihood it would do so.
“There is nothing overly concerning in the underlying dynamic, especially since most of the upside surprise was due to the rise in property taxes, an item more influenced by past house price appreciation rather than the amount of slack in the economy,” he said in an email.
Given the fact that the report follows a string of better news on inflation, and that GDP and employment data remain to be seen ahead of the December rate decision, “we still see a 50 basis-point cut as possible,” Katherine Judge, economist at Canadian Imperial Bank of Commerce, said in a report to investors.
Benjamin Reitzes, rates and macro strategist at Bank of Montreal, said the report “should take some steam” out of those calling for another 50 basis-point cut in December.
“We’ve been in the 25 bp camp from the start and this report only reinforces that expectation,” he said in an email, adding he expects “big upward revisions” in third-quarter GDP data. “We’ll need to see an awful jobs report to drive the bank to cut aggressively again in December.”
What Bloomberg Economics says
“Underlying pressures are easing and prices are declining in the most interest-sensitive spending categories. We think the details of the October CPI report argue for a swift return to a neutral policy stance.
But a slower pace of rate cuts by the Fed and more moderate cooling in the Canadian labor market may push a cautious Governing Council to cut rates more slowly.”
— Stuart Paul, U.S. and Canada economist
Shelter price growth continued to ease in October, rising 4.8%, compared with a 5.0% a month earlier. Both mortgage interest cost and rent grew at a slower pace. Excluding shelter costs, the index rose 0.9%, versus 0.4% in September.
Regionally, prices rose at a faster pace in October compared with September in all 10 provinces.