Economists expect inflation gained steam in October amid gas price jump

Many Bay Street economists are expecting Canada's inflation rate to rise in October, underscoring the challenge facing the Bank of Canada to get consumer price growth back in line with its two per cent target.

Scotiabank Economics sees the Consumer Price Index (CPI) coming in at 7.4 per cent on an annualized basis for October, an increase from the 6.9 per cent annual increase in September, mostly owing to higher gasoline prices and to a lesser extent rising food and services prices.

Capital Economics forecasts a 7.2 per cent year-over-year increase for October, while RBC Economics sees a more modest rise of seven per cent, thanks to fuel and food.

"Driving the increase was a resurgence in gas and fuel oil prices. These prices, declining for months, had been the main factor pulling overall CPI growth readings lower," RBC Economics said in a Nov. 10 note.

"At 10.3% in September, food inflation was already the highest it's been since 1980s—and that momentum likely extended into October."

Meanwhile, Citi Canada and National Bank Financial Markets see headline inflation unchanged or slightly lower at 6.9 per cent and 6.8 per cent, respectively.

"Rising gasoline prices and resilient strength in the services segment should have contributed in boosting the headline figure. Core goods inflation, on the other hand, could have continued to decelerate, but not enough to prevent the headline index from advancing 0.7% on a monthly basis (before adjustments for seasonality). If we're right, the 12-month rate should drop one tick to 6.8%," National Bank Financial Markets wrote in a Nov. 10 note.

Focus on core CPI

While the headline number might have increased, the Bank of Canada will likely be paying more attention to core measures, which strip out the volatile energy and food components.

"Broader 'core' inflation measures—designed to provide a better gauge of underlying inflation trends—have shown some very early signs that the breadth of inflation pressures may be easing," RBC Economics said.

It estimates the number of components in the CPI basket that have seen price increases greater than the Bank of Canada's target has declined since the summer.

Inflation risk higher for Canada than U.S., Scotia says

North American markets cheered the October U.S. inflation print that was released last week, which showed year-over-year CPI rose 7.7 per cent. It was lower than Wall Street expectations and marked a slower increase than in September.

However, Scotiabank Economics' vice-president and head of capital markets economics, Derek Holt, says there are key differences between the Canadian and U.S. inflation reports.

"I'm still of the view that Canada faces materially greater inflation risk than the U.S. and that it would be a mistake if the central bank signalled clearly that it is done next month," he said.

He offers a number of reasons for the differences in price pressure dynamics between the two countries, including recent improvements in supply chain disruptions potentially stalling in the near term, a likelihood of more excess demand in the Canadian economy compared to the U.S., and a higher risk of a wage-price spiral in Canada.

"Rising evidence of labour strife needs to be closely monitored including for spillover effects. The catch-22 to aggressive wage hikes is that they could be precedent-setting for other workers and they would fan inflation and a combination of higher rate peaks for longer," Holt wrote.

Implications for Bank of Canada

Bringing inflation down is still proving to be an uphill battle for the Bank of Canada, even though there's been slight progress from the peak of 8.1 per cent in June.

"While Macklem mentioned that there have been 'some tiny little green shoots' in the last few inflation prints, the BoC will be looking for sustained decreases in core inflation," Citi Canada said.

It predicts a half-point hike at the central bank's December meeting, followed by a 25 basis point hike in both the January and March meetings, which would bring the overnight rate to 4.75 per cent.

The Bank of Canada's interest rate hike in late-October was a half-point increase, smaller than the three-quarter-point rise many economists expected.

"Outside of inflation readings, global supply chain constraints have continued to ease. A variety of shipping indicators have improved. Commodity prices, while still high, are lower than earlier this year. But labour markets are still very tight and consumer demand remains strong. While there are signs that inflation is past its peak in Canada, it will likely take a sustained period of higher interest rates and a weaker economy for price growth to ease fully back to central bank target rates," RBC Economics said.

"Our forecast assumes one additional 25 basis point increase in the BoC's overnight rate in December before it pauses to assess the impact of its rate hikes so far. And risks to that interest rate outlook remain tilted to the upside."

Michelle Zadikian is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @m_zadikian.

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