Statistics Canada reported this morning that headline CPI rose 2.2 percent in the twelve months to September, down from 2.8 percent in August and well below the consensus expectation of a 2.7 percent rise. The spike in CPI during the summer months was largely the result of a big jump in gasoline prices. One can only assume that the economists who contribute to the consensus forecast are all tooling around in Teslas, because otherwise they would surely have noticed that gas prices have fallen back sharply as the so-called summer driving season has wound down.
Despite the relatively benign September data, a Bank of Canada rate hike this coming week is all but certain. The transportation index (which includes gasoline) was the largest single contributor to the gain in headline inflation, but all eight principal components of the index rose on an annual basis. This suggests that inflation pressures, while still modest, are widespread. Moreover, the average of the Bank's three favoured core inflation measures remains right at 2 percent, meaning that the Bank has little leeway to get things wrong.
The last-minute conclusion of the NAFTA renegotiation has removed a big cloud over the economy's prospects. Even before the deal was reached, business sentiment was positive and the economy was operating essentially at full capacity, with the labour market looking increasingly tight. The Bank of Canada has done a good job of staying abreast of the curve here, and another 25 bp tightening move this week would allow it to stay that way. This will in all likelihood be the final move for 2015, but with the Fed set to continue edging US rates higher in 2019, the Bank of Canada will not want to lag too far behind.
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