Canada’s inflation drops sharply, easing rate hike pressure

Darnell Taylor
October 22, 2018

September marked the eighth consecutive month it has exceeded the Bank of Canada's 2.0 percent target.

Although Canadian inflation and retail sales data came in weaker than expected on Friday, market operators predicted the Bank of Canada still would raise interest rates again next week to keep a booming economy in check.

In its most recent forecasts released in July, the central bank estimated inflation would average 2.5 percent in the third quarter - which ends in September - before returning back to near the 2 percent target by 2019.

Statscan showed gasoline prices had increased by 12.0 per cent over September 2017, down from the 19.9 per cent year-over-year jump in August.

"I don't think one month of soft price growth is going to change the Bank of Canada's mind on a rate hike", he said.

The deceleration in the headline rate was mainly driven by transportation prices, which alleviated to 3.9 percent from August's 7.2 percent.

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"We have very high household debt levels".

Inflation had hit 3% in July - the highest in seven years - on the back of gasoline and a jump in prices for air transportation and other travel-related services.

However, the transportation group remained the largest contributor to the overall year-over-year increase in the index. Alcoholic beverages and tobacco products were up 4.4 percent.

Bank of Montreal chief economist Doug Porter noted the price of air fares, while up 7.4 per cent from a year ago, fell 16.6 per cent compared with the previous month. Core measures of inflation - considered a better indicator of underlying pressures - also ticked lower and averaged 2 percent last month. Traveler accommodation service prices were down 6.2% last month. An unexpected drop in retail sales numbers for August will reinforce the view the central bank can take its time on rates. Motor vehicle and parts dealers saw sales increase 0.8 per cent.

Sales at gasoline stations were down 2.0 per cent, while clothing and clothing accessories stores fell 1.2 per cent.

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