Gimme shelter

Canada's headline CPI was virtually unchanged in October from the previous month -- up 0.1 percent unadjusted, down 0.1 percent seasonally adjusted -- according to new data today from Statistics Canada. This lowered the year-on-year rate to 3.1 percent for October from 3.8 percent in September, in line with market expectations. The data certainly reinforce the likelihood that the Bank of Canada's rate hike cycle is at an end, but the details show that it is still premature to be thinking about rate cuts. 

The main contributor to the sharp slowdown in the year-on-year headline rate was a 7.8 percent fall in gasoline prices.  If gasoline is excluded from the calculation, the fall in the year-on-year rate was much smaller, easing to 3.6 percent in October from 3.7 percent in September. It goes without saying that the Bank of Canada can claim little credit for falling gasoline prices, and in any case the situation in the Middle East means that further softness in this important component of the index cannot be relied upon.

In terms of the other main components of household spending -- food and shelter -- the story is rather less positive. Food prices ticked down by 0.1 percent in October but still stand 5.7 percent higher than a year ago.  This is significant,  given that food inflation peaked at more than 10 percent, but it is highly unlikely that this improvement owes much, if anything, to the Federal government's attempts at jawboning the major grocery chains into cutting prices.

The story for shelter is possibly even worse. Rents accelerated to an 8.2 percent year-on-year gain in October from 7.3 percent in September, while mortgage costs are more than 30 percent higher than a year ago. As a result, the shelter sub-index is the fastest rising component of the CPI, up 6.1 percent in the past year.  Given the importance of interest rates as a driver of shelter costs, this is one element of the overall CPI that can clearly be said to be within the Bank of Canada's control, although rapid population growth as a result of record high immigration is certainly not helping. 

The Bank of Canada's three preferred measures of core inflation all fell modestly in October. However,  their mean value is still only just below 4 percent.  Given the Bank's regular restatement of its intention to get CPI all the way back to the 2 percent target, it is apparent that rate cuts will not be on the agenda for many months yet.

So now we await Finance Minister Chrystia Freeland's Fall economic statement later today. Bay Street economists are increasingly outspoken in their view that rapid growth in government spending has been a major factor in driving interest rates higher -- see, for example, this article from Scotiabank. The Trudeau government is clearly starting to set out its stall for the next election, so an austerity budget is not on the cards.  However, any evidence of further fiscal profligacy will be quickly seized upon by the Conservatives. Expect any new initiatives to be focused on the housing sector, and expect Freeland to bend herself into a pretzel trying to argue that a deficit north of C$ 40 billion represents fiscal responsibility.