Edging lower

Canada's September consumer prices data, released today by Statistics Canada, provide further evidence that the recent inflation spike has passed its peak.  Headline CPI rose 6.9 percent on a year-on-year basis, down from 7.0 percent in August and an apparent peak of 8.1 percent in June. The decline was somewhat smaller than markets had expected, but the month-on-month changes -- up 0.1 percent unadjusted, 0.4 percent seasonally adjusted -- point to a lower growth path for overall prices.

Once again StatsCan identifies the fall in gasoline prices as the key factor behind the improvement.  The year-on-year rise in this component slipped to 13.2 percent in September from 22.1 percent in August. The decline would have been larger (and thus the overall headline CPI figure slightly lower) but for a surge in retail gasoline prices in BC, the result of refinery shutdowns. Courtesy of the OPEC+ production cutback, gasoline prices have begun to move higher in October, so this component is not likely to provide further relief to overall inflation in the coming months. 

The news on food prices is much less positive. Prices for food purchased from stores accelerated to a gain of 11.4 percent in September from 10.8 percent in August. This is the fastest pace seen since 1981 and the gains are broad-based, with StatsCan identifying particular upward pressure for meat, dairy, baked goods and fresh produce. 

Excluding food and energy prices, CPI rose 5.4 percent year-on-year in September, up from 5.2 percent in August. All three of the Bank of Canada's special core measures of inflation posted exactly the same rate of increase in September as they had in August. It might be noted that the Bank is having some serious doubts about the usefulness of at least one of these aggregates -- CPI-common, which happens to be showing the highest inflation rate at the moment -- so they may play a smaller role in its decision making going forward. 

There is still no evidence of the dreaded wage-price spiral. Average hourly wages actually slowed to a 5.2 percent gain in September from 5.4 percent in August, well below the headline inflation rate. There are also signs that the Bank of Canada's tightening measures are having an impact on housing costs. Owned accommodation expenses and homeowners' replacement costs both slowed in September in line with the weakening housing market, though mortgage costs not surprisingly pushed higher. 

The Bank of Canada remains likely to raise rates further at its October 26 Governing Council meeting. However, the trends in wages and the housing market and the falling month-on-month pace of inflation mean that the case for further outsized rate moves is rapidly dwindling.