Canada CPI: not bad, but not good

With gasoline prices heading back up again, the consensus expectation for Canada's October CPI foresaw a slightly higher year-on-year rate. As it turned out, Statistics Canada reported this morning that headline CPI rose 6.9 percent from a year earlier, the same pace as in September. Month-on-month the rise in CPI was 0.7 percent, up from only 0.1 percent in September, but this was almost entirely due to a big jump in gasoline prices. It still seems likely that the peak of the inflation spike has passed, but improvement in the year-on-year rate is likely to be slow.

Gasoline and food prices continue to be the principal drivers of headline CPI, both statistically and in the eyes of the public. Gas prices jumped 9.2 percent in October, pushing the year-on-year change, which had been falling in recent months, back up to 17.8 percent. However, there are some signs of moderation in food prices, which rose only 0.4 percent on a seasonally adjusted monthly basis in October, down from 1.2 percent in September; this still leaves food prices 10.1 percent higher than a year ago.

Stripping out food and energy prices, core CPI edged down to a 5.3 percent gain in October from 5.4 percent in September. Two of the Bank of Canada's three preferred inflation measures ticked higher in the month. The mean value of these measures remains just above 5 percent.  Average hourly wages, which the Bank of Canada is undoubtedly watching nervously, rose 5.6 percent in the year to October, up from 5.2 percent in September. 

What happens next? Gasoline prices have been much better behaved in November than they were last month, so it seems likely that the strong month-on-month gain in headline CPI seen in October will not be repeated this month.  However, even if monthly gains return to a slower track, it will still take some time for the closely-followed year-on-year number to fall significantly, since the outsized monthly gains seen last winter are still biasing the calculation higher. The Bank of Canada is approaching the end of the current tightening cycle, but a further 50 basis point increase in the target rate is likely in December.