Canada’s annual pace of inflation slows to 2.2 per cent in September

Irving Hamilton
October 22, 2018

Retailers saw receipts decline 0.1 per cent in August, falling for a second time in three months, Statistics Canada reported.

The central bank, which has consistently said inflation will move back down toward 2 percent by early 2019, is due to announce its next interest rate decision on October 24 and markets expect another hike.

"Beyond next week, we see two more hikes in the first half of 2019", said Paul Ferley, assistant chief economist at the Royal Bank of Canada.

"As mortgages reset to higher rates, debt service costs will eat into household disposable income, weighing on credit growth and consumer spending in the years ahead and auguring for caution from the central bank", added TD Economics. CPI common, which the bank says is the best gauge of the economy's underperformance, dipped to 1.9 per cent from 2.0 per cent in August.

However, the transportation group remained the largest contributor to the overall year-over-year increase in the index.

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Slower headline inflation and easing core numbers will reassure policy makers the recent spike in gasoline prices and other products like air transportation is transitory.

Air transportation costs, which jumped 16% in July, plunged 17% in September. Hotel rates were also down 5.2 per cent compared with a year ago. Traveler accommodation service prices were down 6.2% last month.

The average of the three measures of core inflation, which look to strip out more-volatile items like gas prices and are closely scrutinized by the Bank of Canada, was 2.0 per cent in September compared with 2.1 per cent in August.

Seven of 11 subsectors recorded declines in August, representing 52 per cent of retail trade, the statistics agency said Friday from Ottawa. In volume terms, sales decreased 0.3 per cent.

"However, the slight easing in underlying price pressures combined with signs of softening growth (as indicated by manufacturing shipments and retail sales) will prevent a follow up hike in December and encourage a very gradual path higher in rates still", Grantham wrote in a research note to clients.

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