Inflation Cools but Bank of Canada Expected to Hike Rates

Marco Green
October 22, 2018

On a year-on-year basis, the headline inflation decelerated to 2.2 percent from August's 2.8 percent, as compared with consensus expectations of 2.7 percent. Economists had expected inflation of 2.7%.

September marked the eighth consecutive month that the overall inflation rate has exceeded the Bank of Canada's 2.0 per cent target.

Food prices were up 1.8 percent, while shelter costs rose 2.5 percent.

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.

The Bank of Canada's core measures dropped by one tenth of a percentage point, with CPI-trim falling to 2.1 percent, CPI-median to 2 percent and CPI-common to 1.9 percent.

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.

"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. Alcoholic beverages and tobacco products were up 4.4 percent.

"The biggest factor in last month's swoon was a 16.6-per-cent plunge in airfares, the largest monthly drop in 30 years, which nearly precisely reversed July's 16.3-per-cent spike-which had been the biggest monthly rise in, yes, 30 years", said BMO chief economist Douglas Porter. Hotel rates were also down 5.2 per cent compared with a year ago.

"All of these soft sectors combined to clip core inflation as well, although the easing there was much less dramatic than in the headline tally", Porter said.

Canadian retail trade fell by 0.1 per cent in August - the second drop in three months - thanks, in part, to lower sales at gas stations and clothing and accessories stores, according to Statistics Canada. Excluding the auto sector, retail sales fell 0.4 per cent.

Motor vehicle and parts dealers experienced a gain of 0.8 per cent in August - the first time in three months - because of higher sales at new auto dealers and at automotive parts, accessories, and tire stores to a lesser extent.

Other reports by Click Lancashire

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