Canadian inflation 'bit of a surprise': Economists

Canada's latest inflation numbers show economic stability but come as a surprise, say economists.

"A bit of a surprise on the headline, but some volatility is to be expected," wrote TD senior economist James Marple in a note to investors.

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"Upside surprises for the Canadian economy have been a bit of a rarity in recent months, and we saw two of them in today’s releases," wrote BMO Financial Group chief economist Douglas Porter and senior economist Robert Kavcic.

Statistics Canada’s Consumer Price Index saw a 2.4 per cent year-over-year increase in October. British Columbia led the country with a three per cent rise in prices.

Nationally, all major components registered gains, with transportation (+4.3 per cent) and shelter (+2.5 per cent) leading the way. Gasoline prices leapt 12 per cent, after rising 12 per cent in September and nearly 20 per cent in August. While energy prices rose 7.9 per cent year over year, they fell 1.6% month to month, and economists at both TD and BMO anticipate falling oil prices to slow inflation in the coming months.

The second upside surprise today – the biggest one, according to Porter and Kavcic – was retail volumes rising 0.5 per cent in September after three consecutive months of declines. It firmed up the bank's expectation that Canada's economy is on track to hit two per cent real gross domestic product (GDP) growth in the third quarter of this year.

They warn however that the news does little to counter the much bigger force of rapidly fading oil prices.

“More important for the [Bank of Canada] is the economic impact of falling oil prices,” suggested Marple.

“The impact is not negligible and will slow the pace of Canadian economic growth over the next two quarters.”

The Bank of Canada’s policy interest rate sits at 1.75 per cent after two rates hikes this year. The last anticipated rate decision of 2018 is scheduled for December 5.

Interest rate increases pushed mortgage interest costs seven per cent higher in October compared with the previous year.


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