Skip to main content
Ratehub logo
Ratehub logo

3.8% September CPI paves way for BoC rate hold

Finally, some optimism for consumers and policymakers alike; the latest consumer price index numbers out this week show some – finally – hard-won progress against inflation growth in Canada. 

Statistics Canada reports that the metric grew 3.8% year over year in September, softening from 4% in August, and coming in under economists’ expectations – a welcome surprise. From a monthly perspective, CPI fell 0.1% in September, following its 0.4% gain in August.

According to the stat agency, prices dipped across a number of categories including food costs, durable goods, and travel-related services.

As has been the case in recent months, gas prices bucked the slowing trend, rising 7.5% in September, compared to just 0.8% in August. When cutting gas out of the measure, however, CPI rose 3.7% last month compared to the 4.1% in the previous.

The pace of grocery costs continued to slow on an annual basis, rising 5.8% in September compared to 6.9% in August – but given that remains well above the headline inflation number, shoppers are unlikely to feel much relief at the cash register. Still, it’s a promising improvement from last September, when food prices soared at a pace not seen in 41 years.

Promising September CPI paves way for rate hold

September’s better-than-expected inflation numbers have also eased the pressure on the Bank of Canada, giving policy makers more leeway to stick to the status quo in next week’s rate announcement. In addition to the headline number, “core” inflation trim and median measures – two technical metrics – closely watched by the central bank – have slowed to around 3.4%.

This indicates that chillier consumer metrics – such as a softening labour market and spending data – have trickled their way through the overall economy.

“The slower increase in Canadian consumer prices in September was a step in the right direction. It was also long overdue, given persistent signs of cooling in labour market conditions as well as in consumer spending data,” writes Clare Fan, Economist at Royal Bank of Canada.

Indeed, the lagged impact of interest rate hikes to-date will continue to exert downward pressure on consumer spending as debt payments rise as a share of household incomes, making it more challenging for businesses to raise prices as fast and as frequent. With more easing in inflation readings expected in the months ahead, we expect the Bank of Canada to stay on pause through the rest of the year.”

The BoC has held its trend-setting Overnight Lending Rate at 5% since September, following a historic 10 increases between March 2022 and July 2023. Economists largely expect the central bank is now finished, or is nearing the peak of its hiking cycle, which has brought the prime rate in Canada to a high of 7.2%.

However, there’s still plenty of cause for caution on rate direction; Derek Holt, Vice President and Head of Capital Markets Economics, concurs the BoC is likely to hold in coming months, but economic volatility could mean inflation could easily tick higher in the short term.

“The Bank of Canada has cover to skip next Wednesday when its [Monetary Policy Report] tome drops with a dull thud. I expect a hold at a 5% overnight rate with continued guidance that they 'are prepared to increase the policy rate further if needed,'” he wrote in an Economic Indicator update.

“To do anything less than that would violate what I think are ongoing upside risks to trend inflation into 2024. To strike out such a reference would also perversely ease financial conditions relative to what are still priced expectations for a further hiking bias. To pull out the pom poms could make the BoC look rather foolish if the first hint at a soft patch for underlying inflation reverses higher again in subsequent readings.”

The next Bank of Canada announcement is next Wednesday, October 25, 2023.

Also read: