(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.
The central bank’s two preferred core inflation measures also quickened, 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 large rate cut to about one in three, from a little less than a coin flip previously. The loonie gained as much as 0.3% after the report to trade at C$1.3976 against the greenback, while Canadian government bond yields pared declines.
The first acceleration of headline inflation in five months may bolster a case 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 didn’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 delivered their outsize rate cut last month, they said they want to see a pickup in growth and demand. Preliminary industry-based data point to 1% annualized growth in the third quarter, below the central bank’s 1.5% estimate. Final expenditure-based gross domestic product data is due at the end of this month.
On a monthly basis, the consumer price index ticked up 0.4%, versus expectations for a 0.3% gain. It increased 0.3% on a seasonally adjusted basis.
The price increases in October were relatively broad-based, with clothing and footwear as well as transportation among the biggest contributors to the gain.
The gains were also driven partly by short-term pressures including municipal property taxes — which rose by the 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 central bank should cut by 50 basis points next month, even though Tuesday’s release reduced those odds.
“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 report follows a string of better news on inflation, and that GDP and employment data remain to be seen, “we still see a 50 basis-point cut as possible” in December, Katherine Judge, economist at Canadian Imperial Bank of Commerce, said in a report to investors.
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, US and Canada Economist
Read the full report here.
However, 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 basis-point camp from the start and this report only reinforces that expectation,” he said in an email. He added he expects “big upward revisions” in the upcoming third-quarter GDP report as it will reflect recent revisions at the provincial level.
“We’ll need to see an awful jobs report to drive the bank to cut aggressively again in December,” Reitzes said. Employment data is due Dec. 6.
The upside surprise suggests “a tad more stickiness in inflation than expected,” Royce Mendes, managing director and head of macro strategy at Desjardins Securities, said in a report to investors.
“We have more conviction in our call that the Bank of Canada will cut rates just 25 basis points in December. We expect market participants and economists who had been expecting a second consecutive 50 basis-point move to migrate to the quarter-point camp,” he said.
Shelter price growth continued to ease in October, rising 4.8%, compared with 5% a month earlier. Both mortgage interest costs 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.
--With assistance from Erik Hertzberg, Jay Zhao-Murray and Anya Andrianova.
(Adds more details from the report in the 11th paragraph.)
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