Here’s a shocking truth: Canada’s latest inflation report has thrown the Bank of Canada into a tailspin, just days before its crucial interest rate decision. But here’s where it gets controversial—while some economists argue this could delay rate cuts, others insist it’s a blip that shouldn’t derail plans to stimulate the economy. Let’s break it down.
The September inflation figures, released by Statistics Canada, revealed a surprising jump to 2.4% annually, up from 1.9% in August. This half-percentage-point surge, fueled by rising gasoline prices, travel costs, and stubborn grocery bills, has economists divided. And this is the part most people miss—core inflation, which excludes volatile items like energy and food, remained stubbornly above 3%, raising questions about its reliability as a policy guide.
The Bank of Canada, which cut its benchmark rate to 2.5% in September, now faces a tricky decision on October 29. BMO chief economist Doug Porter noted the report makes next week’s decision “more interesting than expected.” While he leans dovish, favoring lower rates to boost growth, even he admits this inflation spike complicates matters. But CIBC’s Andrew Grantham counters that broader core inflation measures suggest underlying pressures are milder than the headline figure implies, potentially paving the way for another quarter-point cut.
Financial markets seem to agree, pricing in an 86% chance of a rate cut as of Tuesday, up from 76% the day before. Grantham argues the economy is poised for a rebound, but it won’t be robust. Despite 60,000 new jobs in September, Bank of Canada Governor Tiff Macklem warned the labor market remains weak, and the recovery “won’t feel very good.”
Here’s the controversial part: Should the Bank of Canada prioritize inflation control or economic growth? Grantham and RBC economist Abbey Xu argue another rate cut is needed to accelerate recovery, citing tepid business and consumer confidence. Xu also highlights easing inflation risks due to factors like lower unemployment and removed tariffs on U.S. goods.
But let’s dig deeper. Gasoline prices, though falling year-over-year due to the removal of the carbon tax, rose modestly in September, contributing to inflation. Meanwhile, grocery prices jumped 4% annually, driven by higher costs for fresh vegetables, sugar, and confectionery. Grantham points to a weaker Canadian dollar and lingering supply issues for beef and coffee as culprits. Interestingly, the removal of retaliatory tariffs on U.S. goods hasn’t yet eased food inflation, as expected.
On the services side, travel tour prices rose due to higher hotel costs tied to major events, while rent prices accelerated to 4.8% annually. Clothing and footwear prices, however, saw smaller increases, tempering the overall inflation picture. And in a quirky twist, “spectator entertainment charges” surged 10.7% year-over-year—bad news for Toronto Blue Jays fans eyeing World Series tickets.
So, what’s the takeaway? The September inflation report is a mixed bag, leaving the Bank of Canada with a tough call. Here’s a thought-provoking question for you: Should central banks rely on core inflation metrics when their reliability is increasingly questioned? Share your thoughts below—let’s spark a debate!
